Friday, January 12 7:17 AM SGT
GLOBAL YIELD: Asian Borrowers Still Scrape The Barrel
By John Parry
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--As the U.S. slowdown threatens to drag the global economy with it, there's a leak in Asia's fragile financial systems that still hasn't been sealed over: the region's bond markets.
By and large, these debt markets remain too shallow a pool to quench the thirst of cash-strapped companies in the region during times of trouble, a problem that could exacerbate the effects of any impending conomic downturn in Asia, some U.S. based fixed-income fund managers say.
"The Asian flu was due to a lack of transparent bond markets," when the region succumbed three years ago, said Peter Marber, president of The Atlantic, a $650 million emerging markets debt fund based in New York.
"The problems haven't really gone away," Marber adds. "In three years these countries haven't been able to really build out functioning, transparent bond markets," partly because many governments have enjoyed budget surpluses, he says.
A Drop In The Ocean
Asian bond markets excluding Japan accounted for $700 billion of securities issued in local currencies outstanding at the end of 1999 translated to dollar terms, according to Merrill Lynch data. That's a mere drop, compared with the ocean of $14.6 trillion in the U.S. and $7.1 trillion issued in the Eurozone.
True, Japan is a hefty bond market, but 70% of its $5.7 trillion volume comprised Japanese Government Bonds at the end of 1999, which are mainly in the hands of domestic investors, says Karim Basta, Merrill Lynch's Senior Global Debt Strategist in New York.
Aggravating the potential distress for most Asian companies outside Japan, the region's currently bruised stock markets are hardly providing a copious alternative source of financing either. The region's equity markets logged a dismal performance in 2000, producing a combined negative 26.4% return according to Merrill Lynch analyst Trevor Greetham.
Many Asian companies have turned to the US and European bond markets to pump up their financing. Most however, are tapping into the syndicated loan market, comprising corporate loans made by a group or syndicate of banks and institutional investors, that may then be traded in the secondary market.
One advantage of this source of financing, as Asian economic growth started to falter in the second half of last year, is that unlike most bond issues, some syndicated loans do not have to get a rating from the major credit ratings agencies.
The syndicated loan market leapt to some $190 billion in new loans arranged in 2000 in Asia, up from $77.2 billion in 1999, according to preliminary data Capital Data Loanware made available to Dow Jones Newswires.
Turning To Syndicated Loans, Especially In Japan
In Japan specifically, growth of syndicated lending was spectacular last year, rocketing to $76.3 billion from $14.8 billion in 1999, Capital Data Loanware's preliminary data showed.
This type of financing can help in the short term, but it doesn't solve the larger structural questions. In fact, some argue it may make these companies more vulnerable should there be another marked global slowdown, which will essentially shut off their access to capital.
"The question is if the Japanese government has gone nearly far enough in rehabilitating the financial services sector," said William Kovacic, a finance professor at George Washington University. Japan's economy is drifting, with gross domestic product growth in 2001 not expected to overstep 1% by much.
Some Asian countries, "are in such a bedraggled financial state that it would be difficult to raise capital" in their domestic bond markets, Kovacic said.
Some international investors argue the effects of a U.S. economic downturn would be felt across the region but mostly in those countries with less transparent markets.
"If the world economy slows worse than expected, one sees higher risks (in countries) where there is less liquidity, less transparency and less (financial markets) reform," said David Ethridge, director of capital markets strategy at credit ratings agency Standard & Poors in New York.
By and large, the reform process in Asia "has not been as fast in coming as a lot of people would like," since the last international financial crisis of 1997, Ethridge said.
john.parry at dowjones.com; 201-938-2096
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"You my win the rat race, but you're still a rat"
- Lily Tomlin
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