There's a Big, Bank-led Change Sweeping Asian Debt Markets
The recent woes of Hanjin Shipping Co. underscore a sea change blowing through the Asian debt market as companies, lenders, and investors come to grips with a 'new normal' in corporate financing: banks appear less inclined to prop up national champions in oversupplied sectors.
That's the conclusion from analysts at HSBC Holdings Plc, who say high private-sector leverage combined with stubborn over-capacity in trade- and commodity-orientated sectors, are propelling Asian banks in mature markets to become more conservative in their lending practices. It's a sharp turnaround in a relationship that has traditionally seen banks maintain support for big local companies.
They cite two cases in point. Last month, Singapore-listed Swiber Holdings Ltd., an oil and gas-related offshore services company, defaulted on a local-currency bond. Court-appointed managers for the firm, which owes more than $1 billion, are battling to resolve the company's outstanding debts to support completion of some of its $1.67 billion of projects. Secondly, South Korea's Hanjin Shipping Co., one of the world's largest shipping companies, filed for bankruptcy protection last week, after assuming a flurry of bond and loan obligations in recent years amid declining revenues in the container-shipping industry.
Both events are significant since these companies notably failed to secure emergency credit lines from their key lenders. That's DBS Group Holdings Ltd in the case of Swiber, and state-run Korea Development Bank for Hanjin.
Fixed-income analysts at HSBC, led by Devendran Mahendran, reckon these cases are a marked departure of the Asian tradition of corporates — especially those in strategic industries — enjoying strong banking relationships. Those relationships have helped the region enjoy a structurally low corporate default rate, with defaults averaging just 0.65 percent in the Asia-Pacific region since 1993, compared with an annual global corporate default rate of 1.44 percent, according to S&P Global Inc.
The analysts on Tuesday note changing attitudes among governments and banks about the efficacy of propping up key sectors, citing the case of Swiber and Hanjin Shipping:
"Both these cases show that perhaps attitudes in Asia are changing and the past practice of banks supporting local champions in an effort to diversify the economy, or as part of an industrial policy, has its limits. In a financial center like Singapore, bank managements are coming under greater pressure to manage risk and to ensure resources are directed towards sustainable businesses. Similarly in Korea, the persistent low growth of the economy is probably putting pressure on the government to revisit the policy championing industrial groups at the cost of bank profitability. In this particular case, the choice was probably clear given the overcapacity in this sector."
The HSBC analysts are far from bearish about the prospects for Asian corporate credit, however, noting that there's still value at the lower-end of the credit spectrum, that bankruptcies to-date have been limited, and that state support for strategic companies isn't going away anytime soon.
But there's a sea-change in lending appetite in mature Asian economies, while, in the case of Singapore, tighter financial regulation is another factor enforcing lender discipline, market participants say.
Recent defaults are "significant" as they show lenders finally have the courage to withdraw support for companies in over-supplied sectors such as shipping and shipbuilding, says Alex Turnbull, the chief investment officer of Keshik Capital Pte in Singapore.
"It would seem that, at least outside of China, a lot of countries that labelled certain industries as strategic and in national interest are now working out that these industries are commoditized, oversupplied and really not that strategic," he said in an interview. "And that comes after years and years of quasi-mercantilist subsidies and support have offered very little in return."
Strong competition between lenders combined with low loan-to-deposit ratios (LDR) — indicating that the supply of local deposit liquidity exceeds the lending opportunities available domestically — has traditionally boosted the ability of financially-strained Asian corporates to roll over debts by tapping lenders' credit facilities. What's more, Asian bankers typically prefer to wait and see if there's a shift in the industry or economic cycle before formally recognizing debt obligations as non-performing, in contrast to the strong American tradition of receivership.
Now, loan-to-deposit ratios have become elevated amid an upturn in the credit cycle, forcing governments and major lenders to beef up discipline in their credit-allocation decisions.
The HSBC analysts conclude that political and commercial realities will also shift the credit cycle in a similar fashion in Malaysia, Thailand, and India in the coming years, but that's unlikely to be the case in China, given ample domestic liquidity for state-backed companies and Beijing's apparently undiminished appetite to support national champions.