Asia-Pacific Bond Horizon

Original piece in today’s Financial Times.

S&P warns of growing corporate repayment risk

By Chris Brewer and Jennifer Hughes in Hong Kong

Asia Pacific companies are on the hook to repay almost $1tn of debt over the next four years — more than half of it priced in US dollars, according to a report by Standard & Poor’s that also highlights the rise in repayments due from riskier, junk-rated companies.

The figures come as investors worry that the dollar’s strength and slowing economic growth globally will make it tougher for borrowers to roll over debts due, particularly in emerging markets, as higher US interest rates increase the cost of refinancing existing loans.

The report covers the $961.4bn of debt coming due that is rated by S&P. Of that, more than two-fifths must be repaid in the next two years.

The increasingly difficult conditions follow a multiyear credit binge during which the region’s borrowers took advantage of record-low interest rates and global investors’ search for higher-yielding assets.

Bond issuance by Asia’s emerging market companies halved last year. Just over 80 per cent of outstanding bonds from emerging market borrowers are denominated in dollars, while a further 6 per cent is in euros.

“With the global collapse in commodity prices, slowing growth and falling equities in China, and the appreciation of the US dollar, companies in the Asia-Pacific region could find credit conditions to be less favourable for refunding debt in the coming years,” said S&P analysts in the report.

By contrast, just 58 per cent of borrowing by developed market groups based in Australia, New Zealand and Japan, is in dollars or euros.

“While there is exchange rate risk, investment grade issuers, particularly in the developed markets such as Australia, tend to largely or even fully hedge their positions,” S&P said.

The biggest danger surrounds riskier junk-rated groups, for which repayments are scheduled to rise sharply.

More than 20 per cent of non-financial institution debt is junk-rated, while 4 per cent of financial institution debt is junk-rated. Repayments of $8.6bn fall due in 2016, while repayments almost double next year — then double again to $30.9bn by 2019.

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