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.

Much business in Asia is still done the old way -- trust is the most important asset. As the region becomes the biggest source of dollar bonds in the developing world, however, investors are starting to question whether they need more in writing. It's high time.

For one thing, bond fund managers are talking about limiting the freedom of borrowers to do as they please with the cash they raise. Issuers in the region have been particularly vague -- almost half of the dollar debentures sold by nonfinancial companies were for "general corporate purposes". That's the highest proportion in the world, and compares with 17.5 percent in Latin America.

Carte Blanche
Asian investors are the least inquisitive about what nonfinancial companies are doing with their borrowings
Source: Bloomberg
* Bonds denominated in euros.

As a result, investors often watch with tied hands as companies use the cash for activities that don't generate cash flow. Creditors are especially unnerved when borrowers buy back shares or pay dividends. It's happening more and more in Asia.

Borrowing for Shareholders
The amount of debt the 100 largest listed companies by assets in developing Asia have for every share outstanding has increased 45 percent since 2013
Source: Bloomberg

The latest case was Hong Kong's Television Broadcasts Ltd., or TVB, which raised $500 million in late September. On Tuesday, the company said it was spending HK$4.2 billion ($543 million), an amount conspicuously similar to what it borrowed, to buy back 31.5 percent of its shares outstanding. The HK$30.5 per share it's paying was 14.7 percent above Tuesday's closing price, and will increase the position of the controlling shareholder to 43.7 percent from 29.9 percent. The buyback is happening even as the company said its profit is dropping by more than 50 percent because of weak advertising. 

After the announcement, the bonds fell the most on record, while the shares soared as much as 12.8 percent. 

Pain Here, Gain There
TVB stock rose as much as 12.8 percent after the company announced it was buying back shares while bonds had their worst drop on record
Source: Bloomberg
* Percentage moves refer to levels for both securities as of Nov. 30.

TVB said in its buyback announcement that it would use existing cash resources. There's no detailed explanation of its source. One thing is clear -- the company would have had to save almost every penny of cash it generated from operations since June 30, 2013, to amass enough for the buyback.

Not a Cash Cow
TVB's cash generation has been dropping, so it's hard to see how it would fund the buyback from operations
Source: Bloomberg

The case has already generated a lot of chatter among bond investors in Asia. Rather than treating the issue as a portfolio hiccup, they should take the opportunity to start changing the culture of trusting issuers and giving them blank checks.

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