The health of Asian banks relative to their counterparts in the west has helped insulate the region’s companies and economy from the worst effects of the global financial crisis. The crisis, however, has not spared Asia’s still-developing debt capital markets, and the disruptions in local bond markets could be leaving companies dangerously reliant on banks for essential funding.
Thirty percent of the 138 large Asian companies, surveyed by Greenwich Associates between 20 May and 5 June 2009, say their access to bank revolving credit lines has improved over the past three months, with 18% reporting that it has become harder for them to access revolvers and almost 55% saying their access has not changed. Although companies were more divided on how their access to revolving term loans has changed over the period, the Asian results stand in stark contrast to the situation in Europe, where roughly half the 250 large companies participating in the survey say their access to both types of bank credit has been curtailed.
“Due in part to their continued access to bank credit, more than 30% of Asian companies report that they have increased the amount of capital required to fund operations over the past three months, despite the global economic recession, and only 15% say they have reduced their operational funding needs,” said Greenwich Associates consultant Markus Ohlig. “This is an expansionary signal reflecting conditions much different than those in Europe, where 30% of companies have scaled back operational funding needs and only 20% report increases.”
The survey results include some less positive results, but even here conditions in Asia appear better than those in the west:
- Although 30% of Asian companies have cut back on their financing needs for capital expenditures, a quarter say they are spending more on cap ex now than they did three months ago. In Europe, 40% of companies have ratcheted back capital expenditure needs and only 12% have increased them.
- Approximately 40% of Asian companies have reduced their need for acquisition finance and only about 15% have more need for acquisition finance now than they did three months ago. In Europe, half of companies have reduced their need for acquisition financing and only 10% increased.
The ability and willingness of banks to lend to Asian companies has played a key role in keeping companies and the economy of Asia on firmer footing than those in the west. However, Asian companies report that another important source of capital has broken down as a result of the crisis. In a prior study conducted by Greenwich Associates in February 2009, almost 60% of Asian companies said their ability to tap long-term bond markets for funding had been reduced in the last quarter of 2008 and only 6% said their access had improved. More than a third of Asian companies participating in the June Greenwich Market Pulse say their ability to raise funds through long-term bond issues has been further diminished over the past three months, with 20% reporting that their access to debt capital market has improved and 46% reporting no change. The trend of increasing reliance on bank finance in Asia is a shift in the opposite direction of that seen in Europe, where corporations have issued record amounts of bonds during the first half of 2009, reducing their reliance on bank lending.
In the short-term, this shift could slow the development of capital markets as an alternative avenue of financing for Asian companies. “Asian debt capital markets are reliant on investments from western institutions, many of which retreated from the emerging markets during the financial crisis,” said Ohlig. “At the same time, our research has documented the contraction of developing domestic Asian bond markets that, prior to the onset of the crisis, were viewed as a critical source of stability for local Asian economies. As a result of these developments, banks have emerged as the only viable financing alternative for many Asian companies.”
Tighter Terms, Higher Rates
Fifty-five percent of the Asian companies participating say they have been forced to pay higher rates for financing, regardless of the source, and more than a quarter have had to accept more restrictive terms or covenants. Slightly less than 25% say they have been forced to decrease the overall amount they had hoped to borrow. Although these results are hardly indicative of a favourable credit environment, they are more positive than those seen in Europe, where three quarters of survey respondents say they are paying higher interest rates for their financing, more than a third say they have been forced to accept more restrictive covenants and a quarter say they had to decrease the amount they were looking to borrow.
Nevertheless, almost 55% of the Asian companies say they are reassessing the role of at least one bank in their banking group as a result of the financial institutions’ performance during the financial crisis. When asked to name the important criteria they use in selecting their ‘strategic’ banking relationships, Asian companies cite competitive credit pricing second behind only financial strength/stability. In Europe, competitive pricing ranks fourth behind financial strength, loyalty to customers and willingness to lend. As Ohlig explained: “For the most part, Asian companies are currently able to secure credit, but are quite concerned about maintaining affordable prices and acceptable terms, while in Europe, companies are much more preoccupied with simply getting the credit they need, regardless of price.”
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