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December 1999

Asian credits - Being rational about recovery


Most Asian economies have in recent months recovered strongly from the 1997 crisis. But there's a distinct lack of irrational exuberance among both borrowers and lenders. The irresponsible big spenders have been cleared away and the best credits don't necessarily want to borrow at all. Banks aren't exactly falling over themselves to lend to responsible corporates that survived the crisis because of their prudence and integrity. But their merits are increasingly being recognized. Peter Lee reports.




Smith: saw good Asian companies hit along with the bad
When the financial crisis broke across Asia in the second half of 1997, the best companies were hit just as hard as the good. It was a shock of such sudden appearance and virulent intensity that no-one could have been prepared for it. "Even the top Hong Kong land companies with very conservative gearing levels of 20% or less and family owners measuring their net worth in billion of dollars - who must have thought that nothing much could harm them and that a crisis might even help the strong companies to stand out - suddenly found that banks simply stopped lending to them. The head offices of many Japanese, European and American banks completely reined in their Asian operations," recalls Alan Smith, vice-chairman of CSFB in Asia. And with the domestic Asian banks drowning in bad debts, the result was a temporary seizure in credit that ushered in two years of panic and confusion. "If you see your net worth fall from $5 billion to $1 billion in a few months, it's easy to imagine your last $1 billion disappearing too," says Smith.

By the end of 1999, most Asian economies, Indonesia aside, have shown strong recoveries in economic growth, trade balances and foreign-currency reserves. Korea is likely to post GDP growth of more than 8% for 1999, Thailand just under 4%, the Philippines 3%, Malaysia 5%. Interest rates have returned to single digits in most countries following the surging inflation that accompanied currency devaluation in 1997. Current accounts have benefited and foreign exchange reserves been rebuilt. Stock markets have boomed. Hong Kong is up 30% this year, Korea up 120%, Malaysia nearly 70%, Singapore up 62%, Thailand up nearly 20%.

Cordeiro: private capital flows are resuming
And in the credit markets, too, signs of recovery are becoming ever more apparent. Malaysia, which borrowed at 330 basis points over treasuries earlier this year, in a deal that seemed daring at the time, has seen spreads on its international bonds tighten towards 225bp; Korean spreads have come in from 400bp earlier this year to 225bp over the summer and to around 200bp in mid-November. In early 1997, KDB (Korea Development Bank) bonds had traded at as tight as 75bp over treasuries - at the worst point in the crisis at the end of that year, they were being quoted at 1,000bp over. "In the last few months, we have seen a resumption of private capital flows into the Asian bond markets for the first time in two years," says Carlos Cordeiro, managing director at Goldman Sachs. However, he points out: "Flows are still less than they were pre-crisis largely because both international commercial banks and fund managers have reduced their exposure to Asia specifically and emerging markets more generally. Having said that, we are optimistic that global demand for Asian fixed income securities will continue to support an active new issue calendar in the new year."

When credit rating agency Standard & Poor's upgraded Malaysia and Korea in mid-November, it confirmed the resolution of those firms that had promoted their bonds through the tough times. "If KDB or Kexim [Export-Import Bank of Korea] did a deal today, depending on the maturity, they could raise debt with a coupon between 7.5 to 8%," says Glenn Kim, head of debt capital markets at Lehman Brothers Asia. "We have always traded Korea off our high grade bond desk. From the start of this year, as the country began to be up-graded, we saw large inflows into Korea from mainstream investment-grade buyers like insurance companies, taking core positions in Korean debt for the coupon and spread performance, while cross-over buyers, hedge funds and global emerging market bond buyers increasingly looked to exit out of Korean sovereign debt. With the sovereign now trading in the mid to high 100s, we are also observing that investors, many of whom have benefited from tremendous spread compression on the Korean sovereign, are looking to diversify their Korean exposure and are selectively looking at strong names in the corporate sector. These names include Korea Telecom, Kepco[Korea Electric Power Co] and Posco [Pohang Iron & Steel Co] and possibly some attractive growth stories."

At the worst point in the crisis, credits from China and Hong Kong were being quoted in the ragged remains of the thinly traded Asian bond market at spreads as wide as 800bp. At the height of enthusiasm for all things Asian in 1996 and early 1997, spreads had narrowed to 60bp over. This year has shown a marked recovery toward those levels. At the start of this year, Hong Kong's Mass Transit Railway Corp sold a $750 million 10-year bond priced at 287.5bp over treasuries. Within a week it tightened to 244bp over. By late August it was at 190bp. And by mid-November, spreads on stronger Hong Kong and China credits were at around 150bp over treasuries.

Raymond Kwok: still gets bank loans but is diversifying funding
Over a glass of iced water in the lobby of Island Shangri-La Hotel, Raymond Lai, finance director of the Airport Authority of Hong Kong (AAHK), reflects on the lunch he has just taken with a group of investment bankers who have been urging him to refinance a portion of his syndicated bank credits in the bond markets. They have been suggesting pricing of 150bp over treasuries, but Lai is inclined to wait. "The problem is that the greatest liquidity is in the short maturities of three to five years. Anywhere beyond that there is a premium to pay that may set a dangerous precedent. The Asian premium may have diminished but it is still there." Privately some bankers agree, questioning why a borrower like the AAHK should have to pay any premium over that of a composite single-A-rated US corporate issuer which would expect to pay less than 100bp over treasuries.

Lai reasons that against a backdrop of economic improvement in Hong Kong and broadly in Asia, solid growth in passenger and cargo volumes through the airport and a shrinking premium on Asian credits, it may pay him to wait. "We want to lengthen the maturity of our existing stock of debt which, at an average of two years is far too short. We would like to borrow very long term so as to match the useful life of our assets, but there would be a price for doing that and so we will probably start at 10 years. Our $6.5 billion revolving credit gives us some flexibility and an issuing window of 18 to 24 months. In an improving market, time is on our side." Bankers have been badgering Lai to refinance with a yankee or MTN issue, but he may keep them waiting until well into 2001.
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