Asian corporates risk taking USD funding for granted

Singapore

AS VOTE tallies in the US elections spilled into headlines over several days in November, DBS's chief dealmaker in bonds was hardly keen to place bets on the final victor.

Not that the eventual win by Joe Biden is a mere footnote in 2020, in itself a year of tumultuous change. It is that the top risk of geopolitical tensions still dangles over Asia like a chandelier of knives, according to Clifford Lee, DBS's global head of fixed income.

And that preoccupies him these days. He fears what is missing is a sense of "paranoia" among Asian corporates - that the freer access to US dollars in the last five years or so may be unwound by US-China tensions and catch businesses here off-guard.

"I feel that an irreversible paranoia should already be instilled in Asia - free access to US (dollar) capital is not a given," said Mr Lee. "Access to dollars might be under threat."

This call for caution comes off positive development on dollar funding for Asia.

Today, roughly four out of five bond deals originating out of Asia have been closed without a need for a sign-off for US distribution. This means that dollar-liquidity circulating within Asia is funding Asian growth, which speaks to the maturity of the region, said Mr Lee. Such dollar liquidity would include USD flows from multi-national corporations with regional treasury centres set up in Asia.

It can be seen from the recent landmark 50-year USD bond issuance sold by Temasek Holdings. There had been expectations that much of the issuance would be taken up by more investors out of the West. Instead, Asian-based investors swallowed a big chunk of it, he said.

Such funding assurance has removed some fears of Asian corporates being shut out from USD funding, which happened during the Global Financial Crisis. Then, Asian firms were frozen out of the dollar-debt market for about five months after the collapse of Lehman Brothers in September 2008, with an S&P report showing that this precipitated a surge of credit downgrades in the region.

But that build-up of confidence in Asia should not ignore the bubbling tensions that have been reflected in incidences such as the treatment of ByteDance's TikTok, or sanctions that threaten trade and finance relations.

In particular, access to the greenback in Asia is important as it is the dominant currency in cross-border trade. That Asia is not cashing up at the same rate as "the best and the brightest out of the US and Europe" as the world tiptoes into 2021 - a year of distress - scares Mr Lee.

To be sure, issuers from Asia ex-Japan are not far off from the 2019 record, having sold more than US$323 billion of notes in the US currency as at mid-November, compared with the all-time high of US$326 billion last year, Bloomberg data showed.

But the issuance of investment-grade bonds by US companies surged 70 per cent over a 12-month period ended August 2020, compared to a year ago, to a record US$1.51 trillion, a Moody's report in September showed. US high-yield bond issuances more than doubled too.

Some Asian issuers will be sidelined from dollar-bond markets because of fundamental business challenges brought on by Covid-19, with any related liquidity crunch posing a problem later too, noted S&P.

Swathes of regional issuers - including Indonesian issuers highly exposed to property - are vulnerable to being shut out of USD funding. Indonesian issuers will find it tougher to replace that capital with bank loans amid rising caution by Indonesian banks, it added.

Notably, said S&P, Indonesia's speculative-grade issuers have some reliance on US dollar funding partly because they have limited domestic funding options.

Over in China, while Chinese developers raised seven times more in the dollar-bond market than that domestically in January, issuance in renminbi bonds by April was 50 times greater than that raised in dollars, the S&P report in May showed.

Government support, which included speeding up approvals for bonds, drove domestic issuance in China to supplant offshore markets as property developers' main source of non-bank funding during the crisis. The property sector contributes to about a quarter of China's gross domestic product.

Having been "lulled into complacency" that dollar-denominated bonds will always be available, Asian corporates need to wise up to the risks of their funding tap turning down to a trickle, noted Mr Lee.

"If this risk actually comes to bear, China and Asia will only have themselves to blame, if they haven't been starting to work on a hedge," said Mr Lee. "Now, is the hedge euro? Is the hedge CNH (offshore renminbi)? Is the hedge yen? We don't know. But there would need to be a hedge."

To further fix the fragmented Asian bond market so that Asia can more sustainably finance itself, one way may be in releasing cross-currency restrictions that were put up following the Asian Financial Crisis (AFC). Prior to AFC in 1997, cross-currency markets were liquid and vibrant, said Mr Lee, recalling how rupiah-denominated bonds were being sold into the Thai baht market on a cross-currency swap. Likewise, funds from ringgit-denominated debt were swapped for Philippine pesos.

Loosening capital controls also opens up the trillion-dollar onshore renminbi bond market.

"I don't expect it (capital controls) to go away next year, but this sudden crossing of line in recent geopolitical tensions should urge us into more action than inaction. And it should be driven by the respective countries whose own economies are at risk of being cut off from capital," added Mr Lee.

"There's so much liquidity in Asia that to make the capital flows within Asia more efficient is in itself such an attractive task."

There remains too a hugely unsated appetite for debt products in Asia, particularly as infrastructure growth in this part of the world needs to be funded by the capital markets, and no longer by banks alone.

"Everybody's at the party, they're all dressed up. They have a bottle of champagne in hand, some have hors d'oeuvres, all you need to do is open the door so that they can come in and mingle and make it work," noted Mr Lee.

"But the doors are closed, and they are closed by policy lines. I'm hoping that the geopolitical tension will finally wake ourselves up."