Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Millions of words have been expended on China's debt problem. Two points need making: The danger is Asia-wide. And if an implosion is coming, it's most likely in the next three years.

Nonfinancial corporations in the region face a string of record offshore maturities from now until 2019 -- a total $219.7 billion of bonds denominated in dollars and euros is due between January 2017 and December 2019.

Crunch Time
Asian nonfinancial companies must repay a record $87 billion of global bonds in 2019. Chinese firms owe $50.8 billion of that
Source: Bloomberg

Much of that debt was issued over the past three years. Since March 2013, currencies across Asia have dropped, in some cases by double digits.

More Debt, Less Dollars
Currencies in Asia have been depreciating for the past three years, just as record dollar maturities loom
Source: Bloomberg

The obvious outcome of this cocktail is a lot of defaults. While they have picked up in the past two years, low interest rates from the U.S. to Japan have impeded a worst-case scenario. For all that, the $3.3 billion of notes with missed coupons this year is already the highest level since 2012. 

Lost Wallet
The amount of offshore notes on which Asian companies missed payments has been rising steadily
Source: Bloomberg

It's only going to get worse. Even with record monetary stimulus everywhere, companies in Asia face a host of challenges, from a slowing economy in China that's dragging the whole region down, to shrinking profit margins. 

Asia's private sector, excluding China, has seen the largest increase in external vulnerability among emerging markets over the past five years as its debt soared, Moody's said in a report July 20. The proportion of junk bonds in the high-risk categories is now one-third of all Asian sub-investment-grade notes; only a quarter of them were there when issued.

Downward Drift
The percentage of junk bonds in the single-B or C categories, considered at high risk of default, rose to 36 percent of notes outstanding from 25 percent at issue
Source: Bloomberg

It may be hard to zero in on the pressure points, though some sectors such as coal, steel, oil services and cement have already started showing weakness. What investors need to be mindful of is the effect on banks. For every bond that defaults, several loans go unpaid. Once bank facilities -- on which there is a lot less public data -- are factored in, the amount of pain already coursing through Asia is much larger. The best proxy is nonperforming loans, and they're rising everywhere. 

Rising Pain
The nonperforming loan ratio in almost every major economy in Asia has risen this year
Source: Central bank monthly statistic compilations; Bloomberg
* Refers to first quarter numbers.

With continued monetary stimulus making funds cheap, the problem is unlikely to assume the proportions of the 1998 Asian financial crisis. But if there is any change in global monetary policy by 2019, things could get really ugly. This time, sovereign debt won't be the problem -- it will be corporate debt. 

Even if the worst doesn't happen, brace yourself: A bulge in Asian defaults is a certainty between now and the end of the decade.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net