Cash-rich chief financial officers (CFOs) looking to increase capital spending, could turn to the debt markets. This is most likely for Southeast Asia-based companies given that domestic markets have ample liquidity.
The majority of CFOs expect their companies’ borrowing requirements will either increase (36%) or stay the same (37%) this year compared with 2012, according to the Bank of America-Merrill Lynch (BoA-Merrill) 2013 CFO Outlook Asia report released on July 8.
Fifty-four percent of firms based in developing countries in Southeast Asia (SEA) are mostly likely to raise additional levels of debt, especially in Thailand where 66% of CFOs say they will increase borrowing, adds the bank.
“The financing environment remains extremely robust with Southeast Asia CFOs most likely to expand their borrowing requirements,” said Steven Victorin, head of Asia Pacific corporate banking and global corporate banking subsidiaries at BoA-Merrill at a press conference held in Hong Kong on July 8. “This is consistent with their intentions to spend more on expanding their businesses and with their forecasts of stronger revenues and profits this year.”
However, the need to add financing comes from a small base and among several options presented, the top three purposes identified for which CFOs are considering financing are capital expenditure (capex) accounting for 23%, working capital at 17% and expansion within their countries of operation at 16%, notes BoA-Merrill.
All this is helped by the fact that corporates in the region generally have easy access to credit.
For example, a majority of CFOs or 46% say that credit has increased, while 44% believe it has stayed the same over the last year. It has especially become more available for firms in high growth countries such as the China, India, Indonesia, Philippines and Thailand, says BoA-Merrill.
However, some CFOs say credit availability has fallen. As many as 17% of CFOs in Australia and 11% in Malaysia reply that it has decreased compared with the 4% regional average.
“A possible explanation is that companies in developing and high growth countries are able to borrow more easily from their expanding domestic banking sector, but companies in richer countries are feeling the effect of lower levels of international lending by European and US banks,” said Victorin.
Bank loans thrive
Despite the vast range of financing options available to CFOs, companies in Asia still tend to rely on traditional bank loans (28%) or tap into internal resources (14%), notes BoA-Merrill.
Surprisingly, domestic (4%) and international (3%) bond markets appear rarely in CFOs’ replies, despite attempts by finance ministries and central banks in the region to foster the development of local markets and the record levels of US dollar issuance by Asian companies during the past two years, adds the bank.
“Quite frankly they’re cash rich and they have a lot of flexibility. They are looking for flexibility with their financing and whilst all the markets are open to them, they can be a lot more flexible in looking at their options,” said Victorin.
“Having a greater focus on the bank loan market where those facilities can be structured to allow more flexibility from a drawing down basis as oppose to the bond market, which remains very attractive and an important option for clients,” he added.
In fact, Southeast Asian loan volume for totalled US$42.1 billion in the first half of 2013, up 5% from the first half of 2012 and the highest half-yearly volume since 2011, which stood at US$48.4 billion, according to Dealogic.
Cost of funds
Although upcoming Basel III requirements is likely to have an impact on the future cost of funds, 47% of CFOs in the region expect costs to be similar to 2012, 30% think it will increase and 19% reckon it will fall, adds the bank.
Much of it will depend on the policies of Western, and especially US, monetary authorities after several years of low interest rates, says Victorin. At some point the risk-free rate must rise which will cause the cost of capital to move higher too.
While this could be a potential risk in addition, companies in Asia have not sped up their refinancing programmes in anticipation of higher rates.
“Anecdotally we have not seen clients changing their refinancing calendar to anticipate those kinds of events,” said Victorin.
The conclusions of the survey are based on over 600 interviewees conducted with financial executives from 12 markets across the region. Over 50% of respondents came from corporations with annunalised revenues of US$500 million or above, representing a broad range of multinational, regional and local companies.