Asia's debt-fuelled boom under threat from corporate credit meltdown

A man sitting on a bicycle looks at a stock market indicator board in Tokyo, Japan, on March 25, 2020. PHOTO: EPA-EFE

As the coronavirus pandemic roils credit markets around the world, Asia is under particular threat.

The region has led the world in economic growth for years as debt helped fuel frenetic construction of airports, bridges and apartment towers for millions of people moving into cities. That model is now running up against an unprecedented spike in borrowing costs, as investors who piled into the region's riskiest debt at a record pace grow anxious.

"It's all coming home to roost," said Mr Charles Macgregor, head of Asia at Lucror Analytics, an independent research firm based in Singapore which focuses on high-yield credit. He has a negative outlook on Chinese industrial companies, along with Indonesia's and India's high-yield borrowers.

Bond holders are now racing to dump their positions after snapping up a world-beating 140 per cent jump in junk-rated Asian dollar issues last year. Spreads have soared to a 10-year high, new issuance has slowed to a trickle and analysts at Goldman Sachs Group are predicting that defaults will rise.

The swing from boom to bust has been swift even by the standards of today's manic global markets. Weakening Asian currencies put additional strain on firms that borrowed in United States dollars.

The depth and breadth of the pain will depend on the path of the pandemic and government efforts to prevent economic depression, but some businesses are running out of time.

About 40 per cent of the US$11.4 trillion (S$16.3 trillion) in bonds issued by Asian companies will mature before the end of next year, including about US$23 billion of stressed dollar notes due this year.

Money managers once seduced by high yields have lost their appetite for risk. Since Feb 20, investors have withdrawn over US$34 billion from corporate bond funds, according to the Institute of International Finance.

The current situation echoes the 1997 Asian financial crisis, when companies took on unprecedented levels of dollar-denominated debt, said Mr Xavier Jean, senior director for corporate ratings at S&P Global Ratings.

The pandemic is forcing companies to draw down credit lines and even brings fears of a protracted malaise that has some flavour of a depression. In an early warning sign of pain in Asia, Singapore's economy contracted the most in a decade in the first quarter.

The credit market turmoil adds to risks for a region that again surpassed other areas with a 5.3 per cent economic growth rate last year, but is now particularly vulnerable as travel bans and lockdowns crimp exports.

  • US$34b

    Amount that investors have withdrawn from corporate bond funds globally since Feb 20, according to the Institute of International Finance.

While domestic bond markets in Asia have become more robust and banking systems healthier, the corporate sector is still wobbly. In Indonesia, Thailand and Singapore in particular, currencies have lost at least 7 per cent against the dollar this year.

Indonesia's corporate debt is the most precarious. The currency is down a region-worst 15 per cent, and the local bond market is less robust than its neighbours'.

In the past month, S&P has either downgraded or changed outlooks to negative for six Indonesian companies with US$3.2 billion in total debt outstanding.

Oil and gas explorer Medco Energi Internasional is among them, with a credit profile that only gets weaker the longer the oil price war goes on.

In the region, China "is the elephant in the room", said Ms Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis. China accounts for about one-quarter of the world's total corporate debt, and among stressed debtors, it is an even bigger player: A report last year suggested that some 40 per cent of the world's riskiest debt was owed by Chinese corporates.

Chinese builders, including China Evergrande and Kaisa Group Holdings, are the biggest junk bond issuers in Asia, accounting for about 48 per cent of that market. Now the coronavirus pandemic has brought sales to a halt, drying up the short-term financing the industry relies on. This month, Ms Herrero invoked another pachyderm, calling the sector "a hibernating grey rhino waking up to global risk aversion".

The region's most stressed companies cannot wait for a long recovery. Among Asia-Pacific borrowers with yields above 15 per cent, US$23 billion in US currency bonds matures before the end of the year, according to Bloomberg-compiled data.

Among these are Indian auto company Tata Motors, with a dollar bond maturing next month, and China Evergrande Group, one of China's most indebted developers, with net debt of US$88.5 billion as of June. Garuda Indonesia, the flagship carrier of Indonesia, also has US$500 million in debt set to mature in June, and global air travel has ground to a halt.

They will all pay dearly to refinance or to access new capital. Spreads on Asia junk dollar bonds have jumped over 700 basis points this year to at least a 10-year high, according to a Bloomberg Barclays index.

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A version of this article appeared in the print edition of The Straits Times on March 28, 2020, with the headline Asia's debt-fuelled boom under threat from corporate credit meltdown. Subscribe