Asian Corporate Credit Conditions: Clouds on the Horizon?
Although the credit environment remained quite favourable for Asian companies last year, new data from Greenwich Associates suggests that, for some companies in the region at least, conditions are no longer improving.
Asian companies have taken advantage of a prolonged run of strong credit conditions to diversify funding bases by supplementing bank loans with capital markets issues and other sources of funds. They have been able to achieve that goal due largely to the fact that companies enjoyed easy access to bank credit and funding from other sources last year.
Approximately three-quarters of the large companies participating in the Greenwich Associates 2011 Asian Large Corporate Banking Study said they had no difficulty securing bank credit last year, with another 15% reporting only minor difficulty. Those shares were essentially unchanged from 2010.
Signs of Change
An additional 71% of companies said they had no trouble accessing funds through the commercial paper market. While that share certainly reflects a favourable credit environment, it was down significantly from the 78% of companies reporting no difficulties accessing funds through the commercial paper market in 2010. A third of large Asian companies say their access to funding of all types for ongoing operations improved in 2011 and 31% reported improved access to funding for capital expenditures. But as in the case of access to commercial paper markets, there are signs here that credit conditions have begun to moderate.
In 2010, only 2%-3% of large Asian companies reported deterioration in their ability to access funds for ongoing operations or capital expenditure (capex). In 2011, that share increased to 8%-9%. At the same time, the share of companies reporting improvement in these measures actually declined. In 2010, 46% of companies said their ability to access funding for ongoing operations had improved the year before and 43% of companies reported improved access to capex funding.
The most dramatic – and perhaps ominous – changes in conditions were reported by companies in China and Hong Kong/Macau, where Chinese banks tightened lending significantly over the course of 2011 as a result of government policies to reign in the country’s fast credit growth. In China the share of companies reporting improved access to funding for ongoing operations dropped to 23% in 2011 from 44% in 2010 while the share reporting diminished access more than doubled to 20% from 9%. The share of Chinese companies reporting improved access to capex funding fell to 26% in 2011 from 48% in 2010 and the share reporting decreased access jumped to 21% from zero. Similar shifts were reported by companies in Hong Kong/Macau.
Conditions Remain Favourable
Nevertheless, credit conditions for large companies in Asia remain much more benign than those facing companies in Europe. “In Europe, companies that have traditionally relied on bank financing are now opting to tap capital markets for funding that, in the current environment of shrinking bank balance sheets, is often cheaper and more reliable,” said Greenwich Associates consultant Markus Ohlig. “In Asia, even as companies make greater use of capital markets and other alternatives, the use of bilateral bank credit has climbed steadily as banks compete aggressively for corporate business.”
Expected Demand for Funding Reflects Confidence
Relatively high levels of demand for capital markets transactions reflects a general sense of optimism among Asian companies about the business environment for 2012 and their subsequent need for funding. Although there is widespread concern that economic growth rates are slowing in Asian countries, a third of Asian companies report increasing need for funding for capital expenditures, and 40% say they have growing need for funding for ongoing operations. In both categories the share reporting declining need for funding is 5% or less.
Debt Capital Markets
Although the share of Asian companies using debt capital markets for funding declined last year, most of that dip can be traced to a sharp fall-off in the share of companies issuing euro currency bonds. Asian companies’ pullback from euro currency bond markets contributed to an 11% decrease in Asia ex-Japan G3 currency bond issuance from 2010 to 2011, according to Bloomberg Asia-Pacific fixed-income market data. Over the same period, however, the share of Asian companies issuing US dollar bonds actually increased to 34% in 2011 from 30% in 2010 and the share issuing local currency bonds in Asia jumped to 61% from 55%. The growing share of companies tapping Asian markets helped push local currency bond volume up nearly 14% from 2010 to 2011, according to Bloomberg data.
The shares of companies planning to issue bonds in all these markets in the year ahead are slightly smaller, but demand is expected to remain quite strong by historic standards. Of particular note: 26% of companies expect to issue renminbi (RMB)-denominated offshore bonds in Hong Kong, with companies pursuing these transactions in order to take advantage of lower RMB funding rates relative to onshore issues and to settle trade transactions with mainland China counterparties. Such strong demand points to continued growth for a market in which issuance more than quadrupled in volume terms from 2010 to 2011, according to Bloomberg data.