A more detailed explanation below.
$1 trillion of Asia-Pacific debt is set to mature through 2020, nearly two-thirds dollar denominated. Figures from a recent Standard & Poor report show an increasing amount of ‘B-‘ or speculative grade bonds maturing each year.
Collapse in commodity prices and appreciation of the US dollar has weakened the outlook on corporate credit ratings. According Standard & Poor, “Of the total $961.4 billion, $191.3 billion is scheduled to mature in 2016; the maturing total is set to rise 15% to $219.5 billion in 2017, after which annual maturities are set to decline slightly.” Emboldenment ours.
Primary concern surrounds speculative-grade bonds, which is most susceptible to refinancing risk. Of the $961.4 billion maturing 2020 S&P rates, $100.2 billion is speculative-grade and maturity schedule of these bonds is rising. While $8.6 billion speculative-grade bonds mature in 2016, this nearly doubles to $15.1 billion in 2017 and nearly triples to $24 billion in 2018. Maturity of speculative-grade bonds peak in 2019 at $30.9 billion. Over 20 per cent of nonfinancial institution debt is speculative-grade, while 4 per cent of financial institution debt is rated speculative.
As emerging Asia (excluding Australia, New Zealand, and Japan) face weaker credit conditions, issuers of speculative-grade bonds face less favourable conditions to refinance their debt through 2020. Corporate bond issuance fell 53 per cent in 2015, and according to Standard & Poor, corporate bond issuance in emerging Asia fell to $545 billion in 2015 from $912 billion in 2014. On the back of a strengthening U.S. dollar, refinancing for bond issuers will become more challenging. This likely factored into the drop in corporate bond issuance, as 82 per cent of outstanding bonds in emerging Asia are dollar-denominated. The Federal Open Market Committee decided to raise its Funds Rate by 25 basis points in December 2015, with a gradual step up through 2020, further weakening the outlook on credit conditions.
Seeing as over 20 per cent of nonfinancial bonds are speculative-grade, which industries are those most vulnerable in the maturity schedule? Table 4 below indicates which industries pose the greatest threat in terms of debt schedules. Note: CP&ES – Chemicals, packages, and environmental services.
Over 70 per cent of nonfinancial bonds maturing through 2020 were issued by corporations in developed Asia, leaving under 30 per cent held by emerging Asia. Refinancing needs of nonfinancial corporations is particularly high in capital-intensive sectors, such as automotive and utilities. Automotive debt maturity stands at $23.5bn and 20.6bn for 2016 and 2017 respectively, while in contrast, utility debt maturity jumps from $11.7bn in 2016 to $22.9bn in 2017.
Breaking down bond maturity schedules among Asia-Pacific industries, CP&ES and Utility pose the greatest threat given their outstanding speculative-to-investment grade ratios. The CP&ES face the greatest refinancing threat as speculative-grade debt represents over 3 times investment-grade debt, and reaching nearly 5 times in 2019. According to Standard & Poor analysts:
“If we look at just the nonfinancial sectors with the highest amount of speculative-grade debt maturing through 2020, the chemicals, packaging, and environmental services and utility sectors have the highest amounts maturing in the developed Asia-Pacific region ($25 billion, and $18 billion, respectively). The chemicals, packaging, and environmental services sector has 87% of its total debt maturing through 2020, while the utilities sector has 58%. In emerging Asia, the sectors with the highest amount of speculative-grade maturing over the same time period are homebuilders and real estate companies (with $6.3 billion) and the automotive sector (with $3.9 billion). The homebuilders and real estate sector has been under pronounced stress in the past year because of the slowdown in Chinese property markets: Nearly one-third of the speculative-grade debt maturing through 2020 in this sector is from companies incorporated in Hong Kong; a further 19% are China-based. The homebuilder and real estate debt from emerging Asia issuers maturing through 2020, represents 70% of the sector’s total debt. Rated debt instruments from this sector have a median maturity of 3.8 years.”
Next thing we know: Green Bond issuance in China.
Standard & Poor Report linked here: Asia-Pacific Refinancing $1 Trillion