The downgrade trend is on the rise in the Asian debt markets and no company in Asia has successfully issued a bond rated below ‘B2’. As such, the bond markets could be shut off to 36% of Indonesian high yield corporations looking to refinance this year, according to Laura Acres, senior vice president of corporate finance at Moody’s.
Three or four years ago, much of the high yield debt in Asia was rated around ‘Ba’. Now, however, a greater number of ratings are being assigned in the ‘B1’ and ‘B2’ space, with a shift towards ‘B1’ and below. In Asia, unlike in Europe, all corporations rated ‘B3’ and below are in that space because they have been downgraded, she said.
“In the US and to a lesser extent in Europe ratings are being assigned in the ‘Caa’ space, and companies have their challenges but they are still able to successfully raise debt while being rated ‘Caa’. This just hasn’t happened in Asia.”
“In 2010 when we saw more single ‘B’ names come to the market, 34% in fact of rated issuance was ‘B’ rated. But then by the time we got to 2011, we were moving into a flight to quality market where only 21% of names were rated ‘B’ and it became a ‘Ba1’, ‘Ba2’ story,” she said.
In 2012 there has been slightly more diversity in terms of the rating range of issuers, but issuance itself has been somewhat patchy. This is particularly the case in Indonesia, where there have only been four deals this year, worth a total of US$1.3 billion, according to Moody’s.
“Three of those are existing issuers that are well known to the investment community anyway. So I think one of the key questions that we continue to ask is why is this the case? Why aren’t more Indonesian companies accessing the bond markets?”
Her answer to this is the fact that while there have been very few defaults in Asia [none in 2011, two in 2012] the peak of the credit cycle has passed. This can be seen from the build-up of companies in the Asian high yield space rated ‘B3’ and below.
“Downgrades have exceeded upgrades, for each quarter since Q3 2011. We’re on track now to have the fifth consecutive quarter of downgrade momentum across the Asia Pacific portfolio. If you look at the downgrade to upgrade ratio, for July-August we are currently running at five times. It’s the highest now since the global financial crisis,” she said.
The pickup in terms of companies on negative outlook or under review for downgrade has been driven primarily by concerns over access to funding and liquidity, she said.
“Basically access to funding is now far more difficult for a number of issuers and as a result we’re getting a very strong negative bias in the overall portfolio.”
“Liquidity is a predictor of default, that’s a statement of fact. In terms of our actual analysis, what we do for each high yield issuer is to assign a score of one to four. ‘One’ being a company with very strong liquidity, ‘four’ being those with the weakest. A score of four is for those companies with a very precarious liquidity position.”
There has been a spike in the number of companies scoring ‘four’ over the last couple of months. One in five companies in the Asian high yield space, or 21.8%, is deemed by Moody’s to have a precarious liquidity position. In Indonesia, liquidity is stronger than in the wider Asian high yield universe, but this is due in large part to the country’s banks.
“One of the key reasons for this is the support of the domestic and regional bank markets that are now quite comfortable funding seven year money, and in some cases ten-year money, for Indonesian corporates. But how long is this situation actually going to continue?” said Acres.
Since August 2011, Indonesian liquidity has been stronger than in other markets and stronger than the portfolio as a whole, but she pointed out that there has recently been a spike in illiquidity. Around 12.5% of Indonesian corporates are now in a position of precarious liquidity. Out of the 29 companies Moody’s rates in Indonesia, 25 of them are high yield names.
“Why is this important? A company with limited headroom under covenants typically has less flexibility to raise debt, and is frequently under pressure of debt being accelerated due to non-compliance or lack of headroom. So it has far less financing flexibility, probably at a time when it needs it most.”
“US$4.4 billion of debt is falling due [in Asia] over the next 12 months that will need refinancing. [But] nobody in Asia has raised a bond rated ‘B3’ or below. If you consider this in the Indonesian context, where 36% of ratings are ‘B2’ or below, what we’re saying is that there could be an avenue of funding which is totally blocked off for 36% of the portfolio,” she concluded.