Oriental companies are likely to find it harder to refinance dollar-denominated debt, the decline in an important metric suggests, with all the currency at a two-decade high and a latest surge in inflation forcing central banks to raise interest rates.
The interest coverage ratio of these businesses – a measure of how easily they can pay interest on outstanding debt — slipped to five. 1 at the end of 03, the lowest in a year, pulled down partly simply by firms in China and taiwan, South Korea, Philippines and Vietnam.
Reuters analysed one, 700 Asian businesses (excluding financial firms) for which comparable information was available through Refinitiv. They had a combined market capitalisation of more than US$1 billion dollars.
Asian businesses in total raised US$338 billion in dollar and euro financial debt last year.
But 2021 also saw the bottom in interest rates. By the end of 03 2022, Asian companies’ debt had increased to US$6. seven trillion, up by a quarter from 2 yrs earlier.
Today, the ascending buck and rising main bank rates make interest payments dearer for smaller Oriental firms that do many business locally and don’t have much exports to boost the value of their own earnings.
Furthermore, business conditions have deteriorated as natural material prices have jumped and companies have struggled to pass the extra cost on to customers, squeezing margins.
“Currency risk was put under the carpet in the past five years as rates of interest remained low plus regional currencies remained resilient to less strong economic conditions, ” said S& L Global analyst Xavier Jean.
“As rates increase, we think currency risk may feature more in to fund-raising options as well as the ability and determination of companies to fund in US bucks and into affected situations. ”
The interest coverage proportion for Indonesian businesses, which Jean mentioned tended to be sizable borrowers in foreign currency, dropped to -4. 10 at the end of March, from the multi-year high of twenty five. 13 at the end of September last year.
The particular ratio for Chinese companies fell to 3. 02 through 5. 10 for the similar periods.
Chinese property firms, under pressure since the China Evergrande Group crisis last year, will struggle to refinance debt, said Herald van der Linde, a senior equity strategist at HSBC.
These companies possess dollar bonds having a value of US$12. nine maturing in the second half of 2022.
An interest coverage proportion is operating profits divided by interest expenses.
WEAK HEDGES
There is absolutely no indication, however , that most Asian companies will never meet debt obligations. Indeed, their typical score in an additional ratio – net debt to profits before interest, tax, depreciation and amortisation – was at a seven-year low of 2 . 5 in late March. A percentage higher than 3 is regarded as a cause for problem.
While huge Japanese and Southern Korean companies, including SoftBank Group Corp, issued billions within dollar debt last year, these are typically hedged against any understanding in the dollar. A weak local currency also raises the value of their dollar property and exports.
But sketchy hedges for smaller companies in countries which includes Indonesia and Vietnam are likely to erode stability sheets.
“Indonesian home builders have high exposure to the stronger US dollar, as their hedges are just partly effective, and most issuers’ debt is principally denominated in US dollars while money flows are denominated in the local currency, ” said Matt Jamieson, a senior analyst at Fitch.
Asian home builders, utilities and raw-material suppliers are the crucial industries with currency trading debt maturing this year, he said.
S& P’s Jean said credit quality for at least one within eight companies might be pressured in the next a year because of rising rates of interest. That number could increase to one in 6 if inflation continues.
Dollar funding has already plummeted.
Asian companies issued just 98 bonds denominated in dollars or euros in the first half of this season, the fewest in six years and down from 338 last year.