Coronavirus threatens $32tn of Asia corporate debt
The coronavirus outbreak is threatening to force companies across the Asia-Pacific region to default after years of low interest rates prompted many to gorge on trillions of dollars of debt.
In the years following the global financial crisis to 2019, the volume of outstanding corporate debt issued by companies in the region doubled to $32tn, according to Moody’s, the rating agency.
The coronavirus pandemic has sparked a cash crunch that investors fear will cause a wave of bankruptcies in industries from airlines to retail.
“It’s a little bit crazy out there and there are very few sectors that are protected from this,” said John Park, a Brisbane-based managing director at restructuring firm FTI Consulting. “We are seeing an immediate uptick in inquiries from firms seeking advice on how to prevent a potential insolvency event.”
Among the areas causing particular concern is China’s property market. As of February, the industry owed a total of $647bn in bonds denominated in local and hard currencies, according to Dealogic data.
Sales and construction starts both fell more than 20 per cent in the first two months compared to a year ago, according to Plenum China.
Evergrande, one of the country’s largest developers, owes more than $100bn. The company has issued bonds at coupons of up to 13 per cent, a level analysts say indicates anxiety over its creditworthiness.
Beijing may need to bail out such companies, analysts added, with many considering Evergrande too big to fail.
Tahoe Group, a smaller developer, has about $730m in US dollar bonds maturing over the next 12 months. But it has not told investors how it plans to repay them.
“It appears inevitable that the current level of operational disruption, if unabated, will feed through into higher volumes of covenant breaches, and potentially defaults,” said James Dilley, deals advisory partner at PwC, the professional services firm, in Hong Kong, referring to China’s property market.
The pandemic has also caused a funding squeeze in Thailand, where companies have come under pressure as plummeting tourist numbers hit the economy.
Fitch Ratings last week said the asset quality and earnings of the country’s banks would be “significantly weaker” this year.
The agency also pointed to risks to banks in Vietnam, which last suffered a banking crisis in 2012. “There is not a lot available in terms of buffers for the banks in case the economy sharply impacts,” said Jonathan Cornish, head of Asia-Pacific bank ratings at Fitch.
In Australia, the outbreak has prompted a scramble by some companies to raise equity as they struggle with debt repayments. Webjet, a travel company, and oOh! media, an advertising business, on Friday said they would attempt an emergency equity raising.
A number of the country’s companies are also considering invoking so-called safe harbour laws that give directors at insolvent businesses legal protection during restructuring proceedings, according to David Walter, a Sydney-based partner at law firm Baker McKenzie.
“Some sound businesses are drawing down all available liquidity lines or taking on new loans from credit funds with greater risk appetites. This type of debt may be expensive, but it is far better than literally running out of cash,” he said.
Some investors have started sifting through the debt rubble for opportunities.
“Our trading volume has grown exponentially in March compared to last year,” said Michel Lowy, head of Hong Kong-based credit investment group SC Lowy. “The opportunity for business like ours is to try to figure out corporates that are well-positioned from a liquidity standpoint and will have the ability to weather the storm.”
Oaktree Capital, the US-based investment firm that manages about $125bn, is also seeking opportunities in distressed debt across Asia-Pacific, said people familiar with the matter.
But it will take more than adventurous private investors to soothe Asia’s corporate debt issues.
Hamish Douglass, chairman and co-founder of Sydney-based fund manager Magellan Financial Group, told clients this week the coronavirus shutdown would prove fatal for many debt-laden companies.
He thinks governments could follow the example of New Zealand, which on Friday bailed out the country’s national airline with a NZ$900m (US$525m) loan.
“Only governments can prevent these businesses from failing,” he said.
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