ASEAN companies could face tighter and costlier funding over the next 12 to 24 months due to currency depreciation and the prospect of rising rates, Standard & Poor's Ratings Services (S&P) said in an article on Tuesday.
Anecdotally, lending costs already appear to be creeping up across the region, and most Asean companies are still relying on short-term financing mostly on a floating-rate basis, it noted.
"Recurring headlines about currency depreciations, a slowdown in China, and, more generally, the uncertainty regarding the effect of US monetary policy normalisation are keeping investor confidence in check. Besides the path of US interest rates, a more challenging growth environment could also lead lenders to reassess credit risk and return, following years of deteriorating balance sheets," it pointed out.
While income statements and cash flows have not felt the pinch from growing debts because interest rates are still so low, the prospects of rising rates in the next 12 to 24 months may put an end to the illusion that there is only a benign cost to increased leverage, it explained.
This forecast is a turn-around from the situation of a liquidity flush for Asean companies right after the global financial crisis wound down.
S&P said: "(At that time,) expansion was a no-brainer as the economy and confidence were picking up in what is one of the most populous regions globally. And capital providers were keen to provide abundant and cheap funds to support companies' growth. Debt became cheaper and cheaper, helping fund hundreds of billions of US dollars in capital spending, and acquisitions in the region.
"The mood, however, could well be changing soon. Raising low-cost foreign-denominated debt seemed a good idea at the time, but that decision now looks a lot less favourable following currency depreciations across the board."
Again, anecdotal evidence suggests that companies now looking to raise foreign currency funding are more willing to at least consider hedging - at least partially. Some companies also use a natural hedge.
But hedging is by no means a common practice yet among Asean companies, and S&P believes it is unlikely to become the norm anytime soon, because hedging can complicate the financial management of companies not used to it or which may not understand the implications of certain complex financial instruments.
Going forward, Asean companies will likely continue to raise funds mostly from bank lending, while bond funding will remain a secondary, albeit growing, source of funding over the next two to three years.
On their bank-loan exposure, S&P said companies generally have long-dated and well-established relationships with their historical fund providers, while bond financing exposes companies to investors who might be more fickle and sensitive to overall business confidence.
"Low funding costs, given ample liquidity, has also been beneficial for companies. But this strength could be turning to a relative weakness in the current environment, in our view.
"Bank funding in the region is made predominantly on a floating basis, compared with the fixed-rate nature of domestic and offshore bond markets. This exposes companies to rising interest rates.
"The concentration of funding toward short-dated bank loans is another vulnerability in the context of prospective rising rates because companies will need to refinance a higher share of loans at a higher cost," S&P added.