Asian firms may struggle to refinance dollar debt, ratio says
By Patturaja Murugaboopathy
(Reuters) – Asian companies are likely to find it harder to refinance dollar-denominated debt, the decline in a key indicator suggests, with the currency hitting its highest level in two decades and a recent spike in inflation forcing central banks to raise interest rates.
These companies’ interest coverage ratio – a measure of how easily they can pay interest on outstanding debt – fell to 5.1 at the end of March, the lowest in a year, driven in part by companies in China, South Korea, Indonesia and Vietnam. .
Reuters analyzed 1,700 Asian companies (excluding financial companies) for which comparable data was available from Refinitiv. They had a combined market cap of over $1 billion.
In total, Asian companies raised $338 billion in dollars and euros last year.
But 2021 has also seen interest rates bottoming out. By the end of March 2022, Asian corporate debt had soared to $6.7 trillion, up a quarter from two years earlier.
(Chart: Dollar debt issued by Asian companies in 2021 vs. 2019, by country, https://graphics.Reuters.com/GLOBAL-MARKETS/mypmnrzzmvr/chart.png)
Today, the rising greenback and rising central bank rates are making interest payments more expensive for small Asian companies who do most of their business locally and don’t have many exports to boost the value of their profits.
Additionally, trading conditions deteriorated as raw material prices jumped and companies struggled to pass on the extra cost to customers, which squeezed margins.
“Currency risk has been swept under the rug over the past five years as interest rates have remained low and regional currencies have remained resilient to weaker economic conditions,” said S&P analyst Xavier Jean. Overall.
“As rates rise, we believe currency risk will figure more into fundraising options and companies’ ability and willingness to fund in US dollars and in distressed situations.”
The interest coverage ratio of Indonesian companies, which Jean said tend to be large foreign currency borrowers, fell to -4.10 at the end of March, from a multi-year high of 25.13 at the end of September. last year.
The ratio for Chinese companies fell to 3.02 from 5.10 for the same periods.
Chinese property companies, under pressure since the China Evergrande Group crisis last year, will struggle to refinance their debt, said Herald van der Linde, senior strategist at HSBC.
These companies have dollar bonds worth $12.9 maturing in the second half of 2022.
An interest coverage ratio is operating profit divided by interest expense.
(Chart: Asian corporate dollar debt maturing over the next few quarters, https://graphics.Reuters.com/GLOBAL-MARKETS/byprjaggbpe/chart.png)
However, there is no indication that most Asian companies will not face the repayment of their debt. Indeed, their median score in another ratio – net debt to earnings before interest, taxes, depreciation and amortization – was at a seven-year low of 2.5 at the end of March. A ratio greater than 3 is considered to be of concern.
While major Japanese and South Korean corporations, including SoftBank Group Corp, issued billions of dollars of debt last year, these are generally hedged against any appreciation in the dollar. A weak local currency also increases the value of their dollar assets and exports.
But sketchy coverage for small businesses in countries like Indonesia and Vietnam is likely to erode balance sheets.
“Indonesian homebuilders are heavily exposed to a stronger US dollar as their hedges are only partially effective, and most issuers’ debt is mostly denominated in US dollars while cash flows are denominated in the currency. local,” said Matt Jamieson, senior analyst. at Fitch.
Asian homebuilders, utilities and commodity suppliers are the top industries with foreign currency debt coming due this year, he said.
S&P’s Jean said the credit quality of at least one in eight companies could come under pressure over the next 12 months due to rising interest rates. This number could rise to one in six if inflation persists.
Dollar borrowing has already fallen.
Asian companies issued just 98 bonds denominated in dollars or euros in the first half of this year, the fewest in six years and down from 338 last year.
(Chart: Dollar debt issued by Asian companies fell by a third in the first half, https://graphics.Reuters.com/GLOBAL-MARKETS/lbvgnxkaypq/chart.png)
(Reporting by Patturaja Murugaboopathy in Bengaluru; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Sayantani Ghosh and Bradley Perrett)