Risk aversion has begun to subside, but the international
investors who had bankrolled Asias expansion over the
last few years are notably absent. A wave of corporate defaults
now looks imminent as companies that most need to raise capital
are finding it the hardest.
Emerging market investors fled from Asia in late 2008, sparking
fears of another Asian financial crisis a decade on. Those
concerns may have started to ease, but the financial crisis has
left a number of Asian companies teetering on the brink of
collapse, with balance sheets stretched to breaking point by
falling earnings and crippling funding costs.
Chinese property companies, Indian car makers and Indonesian
mobile phone operators, to name just a few, have borrowed
heavily to finance expansion projects and fund acquisitions,
and those companies are now struggling to restructure their
balance sheets to avoid falling into default.
FerroChina, a Singapore-listed Chinese steel producer,
suspended production and called in administrators in October
after lenders called in some of its working capital loans. One
of the first Asian casualties of the credit crisis, FerroChina
is trying to restructure Rmb5.2 billion ($766 million) of
outstanding onshore and offshore debt that it said it was
unable to repay, including a $200 million, three-year loan
arranged by Credit Suisse as recently as August.
Asia Aluminum, the Chinese metal producer that delisted its
Hong Kong shares in a management buy-out in 2007, asked a court
to appoint provisional liquidators in March after efforts to
restructure its $1.2 billion of offshore debt were blocked by
Both companies had been able to pile on debt with relative ease
during the credit boom of 200407, but were undone when
commodity prices slumped and that access to capital dried up.
The two cases highlight the lack of refinancing options for
Asias highly geared companies, and analysts are worried
that more defaults will follow.
Companies have to get their act together quickly and
focus on survival, not expansion, says Dilip Shahani,
head of global research for Asia Pacific at HSBC in Hong Kong.
Refinancing risks will still be there in 2010 and
Loan market shattered
Those risks were brought sharply into focus in the fourth
quarter of 2008 by the collapse of the Asian loan market, as
international lenders cut lines and retreated to their home
Even though Asias banks survived the US subprime mortgage
disaster mostly unscathed, the regions loan market was
rocked in September as dollar liquidity dried up. Deals that
were being arranged in US dollars for Asian exporters were
suddenly thrown into question as international banks turned
their backs on the emerging markets, while local Asian lenders
were unable to find the dollar funding they needed as the
currency markets seized up.
In an unprecedented move, banks rushed to pass on their own
higher funding costs to borrowers by invoking market
disruption clauses in loan agreements. Originally
designed to protect lenders in the event of a disaster where
the Libor base rate becomes unavailable, the clause was
triggered by a group of mainly European banks who claimed the
Libor rates no longer reflected their true cost of funding. It
allowed lenders to set their own reference rate, typically
adding 13% to interest margins.
Hon Hai Precision Industry, a Taiwanese mobile phone maker,
found itself facing higher financing charges on a $1.035
billion syndicated loan, while Quanta Computer, another
Taiwanese borrower, was hit with higher charges on a $360
million facility. Lenders also triggered market disruption
clauses on the $1.25 billion facility for Wynn Macau, an
offshoot of the Las Vegas gaming firm, as well as financings
for several other Asian borrowers in India and elsewhere.
Singapore-listed First Ship Lease Trust, which charters ships
and tankers, warned investors in October that it would have to
cut its dividend for the fourth quarter after being forced to
pay $680,000 of additional interest charges for the period.
It introduced uncertainties into our business, says
Chen Fung Leng, a vice-president in charge of investor and
public relations at First Ship Lease Trust in Singapore.
We had swapped our floating rate loans to fixed to
minimize volatility, and this rendered some of this swapping
ineffective, so it was a disruption to us.
Chen says the impact of the revision was minimal, and the loans
reverted to their normal rate for the first two quarters of
2009, but the move showed a big shift in the relationship
between Asian companies and their banks, who had been falling
over themselves in recent years to lend at ever lower rates.
The Libor system has since been patched up, but appetite for
Asian loans remains thin on the ground. The Asian syndicated
loan market was hit harder in the first quarter of 2009 than
any other region, according to data company Dealogic. The
volume of new loans signed in Asia Pacific excluding Japan fell
by 70% compared with the first quarter of 2008, while in North
America volumes plummeted 59%, and western European loans fell
Some of the biggest lenders to Asian companies in recent years,
including Royal Bank of Scotland and Citigroup, have scaled
back their activities dramatically, while a number of European
lenders such as Bayerische Landesbank and Icelands
Landsbanki, which opened an office in Hong Kong in 2007, have
closed their Asian operations altogether.
Local markets to the rescue?
The turmoil in the loan market has pushed some of Asias
best-known companies to consider bonds, and some have been able
to seal big capital-raising deals in Asias local currency
Asias local currency debt markets are growing at a
rate of 1213% a year, or 25% if you include the Chinese
market, says Deepak Kohli, global head of debt capital
markets at Standard Chartered in Singapore. There is good
demand from retail, especially now that equity markets have
taken a beating, and the corporatization of savings is driving
growth across Asia.
San Miguel Brewery completed a record-breaking P38.8 billion
($805 million) bond issue in the domestic Philippines market in
March by far the largest debt deal ever in pesos
as banks and individual buyers jumped at a rare chance to
invest in one of the countrys top names.
San Miguel had initially lined up banks to arrange an
international bond issue, but cancelled that deal when it
became clear there was enough demand from domestic investors
despite concerns over slowing economic growth and the global
For strong credits with a good local currency rating, the
local markets are certainly open, says Kohli. Rates
are coming down in a lot of Asian countries, so fixed income
investors are seeing positive returns.
Other local currency capital markets have shown similar
positive signs. Before 2008 deals worth over S$500
million were very rare, but last year we were able to print big
deals for foreign and domestic issuers as risk aversion kept
the US dollar market closed.
The SGD bond market might take a while more to get back
to where it was in mid 2008, but there is definitely still
substantial amounts of liquidity in Singapore. There are heaps
of idle deposits in the banks here that need to be put to
work, says Clifford Lee, head of debt capital markets at
DBS in Singapore.
DBS itself sold a S$1.5 billion hybrid tier one perpetual deal
in May 2008, the biggest of its kind in the Singapore market.
OCBC and Malaysias Maybank followed quickly with similar
hybrids, while a S$640 million deal launched last August by
Singapore Power was heavily oversubscribed.
The retail buyers that had supported many of those big debt
issues disappeared after Lehman Brothers collapsed, nursing
heavy losses on structured notes arranged by or referencing the
bankrupt US investment bank, but bankers are confident of a
recovery. That market wont be the first to come
back, but there is definitely still liquidity in Singapore.
Banks have heaps of deposits they need to put to work,
The bond markets, however, are not open for all, and
lower-rated Asian companies will find it hard to match San
Miguels success. Asias local markets are not
sophisticated enough to support sub-investment grade
companies, says Shahani at HSBC. The high-quality
names can choose to access local or international credit, but
no high-yield borrowers or new names will be able to access the
Refinancing risks remain
Companies that borrowed heavily in the last two or three years
are the most exposed to refinancing risks.
Tata Motors, the Indian car maker, needs to refinance $2
billion of bridge loans it put in place last year to finance
the acquisition of Jaguar Land Rover. It is looking to split
that between a rupee debt issue and an international loan, but
its efforts to refinance the short-term debt have been far from
plain sailing. Last Novembers rights issue wiped out
around $800 million of the debt, but the response from Indian
investors was disappointing, and Tatas parent company had
to step in to buy most of the deal.
Tatas dollar lenders are pushing for better terms on the
refinancing, which risks putting further pressure on the
companys balance sheet at a time when car sales are
sliding. If it is unable to refinance the debt, it will need to
repay the bridge loans on May 23.
The collapse of the structured finance market has also robbed
Asian borrowers of another source of capital. Real estate
investment trusts listed in Hong Kong and Singapore are facing
a refinancing crunch, with mortgage-backed securities and loans
worth S$16.6 billion set to mature in 2009 and 2010, according
to the National University of Singapore. Asian banks, already
wary of falling property prices, have been reluctant to provide
replacement loans with Singapores CapitaCommercial Trust
and Cambridge Reit, finding little enthusiasm for recent
Winmall, another Singapore-listed property trust, priced notes
backed by commercial mortgages at the end of April, in the
first CMBS in the Singapore market for more than two years. The
S$310 million deal is a modest size, but borrowers will be
watching closely for any sign of a revival in Asian structured
A handful of Asian companies has fallen into default since
Lehman Brothers folded in September, including the two landmark
cases of FerroChina and Asia Aluminum, Hong Kong retailer
U-Right and swimwear maker Tack Fat, and Indonesian telecom
company Mobile-8, which failed to repay $100 million of
high-yield bonds after its controlling shareholder sold down
its stake. But many others have been taking steps to
restructure their businesses and reduce debt levels, restoring
investors confidence in the process.
Galaxy Entertainment, the troubled Macau casino operator,
repaid bonds worth $170 million in December after scaling back
its expansion plans in Macau. Pakistan Mobile Communications,
property developer Greentown China Holdings, Hong Kongs
City Telecom and others have since followed suit, booking
one-off profits by buying back their debt at steep discounts to
face value. Others, including Hong Kong-listed Chinese
developer Shimao Holdings, have sold new shares to reduce
gearing, and bankers expect many similar liability management
exercises to follow.
Asian companies have begun to regain access to the
international capital markets. China Zhongwang, an aluminium
products maker, is set to list in Hong Kong on May 8 in the
worlds largest initial public offering so far this year,
while Hutchison Whampoa and Korean steelmaker Posco have each
sold dollar bonds.
Corporate Asia is in much better health than it was in 1998,
and fears for another Asian crisis have faded. But
international investors remain cautious. The
deterioration of credit fundamentals and rise in defaults will
happen here, too, says Joel Kim, head of Asian fixed
income at ING Investment Management in Hong Kong. It is
the companies that most need to raise capital that will find it
the most difficult.