Asian companies may struggle to refinance dollar debt, ratio suggests

These companies’ interest coverage ratios – a measure of how easily they can pay interest on their outstanding debt – fell to 5.1 at the end of March, their lowest figure in a year, partly driven by companies in China, South Korea, Indonesia and Vietnam pulled down.

Reuters analyzed 1,700 Asian companies (excluding financial companies) for which comparable data from Refinitiv were available. They had a total market value of over $ 1 billion.

In total, Asian companies raised $ 338 billion in dollar and euro debt last year.

But 2021 was also the lowest interest rate level. By the end of March 2022, Asian corporate debt had risen to $ 6.7 trillion, an increase from two years earlier.

aphic: Dollar debt issued by Asian companies in 2021 vs 2019, by country,

Now the rising dollar and rising central bank interest rates are making interest payments more expensive for smaller Asian companies that do most of their business locally and do not export much to increase the value of their earnings.

Business conditions have also deteriorated as commodity prices have risen and companies have struggled to pass on extra costs to customers, putting pressure on margins.

“Currency risk has been brushed aside over the past five years as interest rates remained low and regional currencies resisted weaker economic conditions,” said S&P Global analyst Xavier Jean.

“As interest rates rise, we believe that currency risk will play a greater role in raising funds and in companies’ ability and willingness to finance in US dollars and in emergencies.”

The interest coverage ratio for Indonesian companies, which Jean says tends to take out large foreign currency loans, fell to -4.10 at the end of March, from a multi-year high of 25.13 at the end of September last year.

For Chinese companies, the ratio fell to 3.02 from 5.10 in the same periods.

Chinese real estate companies, which have been under pressure since the crisis in China Evergrande Group last year, will struggle to refinance their debt, says Herald van der Linde, a senior equities strategist at HSBC.

These companies have $ 12.9 dollar bonds maturing in the second half of 2022.

An interest coverage ratio is the operating profit divided by the interest expense.

Chart: Asian companies’ dollar debt matures in the coming quarters,


However, there is no indication that most Asian companies will default on their debt obligations. Their median score in another ratio – net debt to earnings before interest, taxes, depreciation and amortization – was at a seven-year low of 2.5 at the end of March. A ratio higher than 3 is considered a cause for concern.

Although large Japanese and South Korean companies, including SoftBank Group Corp., spent billions of dollars in dollar debt last year, most of the debt is hedged against any appreciation of the dollar. A weak local currency also increases the value of their dollar assets and exports.

But outlined hedges for smaller companies in countries like Indonesia and Vietnam are likely to erode the balance sheets.

“Indonesian homebuilders are highly exposed to a stronger U.S. dollar because their hedges are only partially effective, and most issuers’ debt is primarily denominated in U.S. dollars, while cash flows are in local currency,” said Matt Jamieson, a senior analyst at Fitch.

Asian homebuilders, utilities and commodity suppliers are the top sectors with foreign currency debt maturing this year, he said.

S & P’s Jean said credit quality could come under pressure for at least one in eight companies in the next 12 months from rising interest rates. That number could rise to one in six if inflation continues.

Loans in dollars have already fallen sharply.

Asian companies issued just 98 dollar- or euro-denominated bonds in the first half of this year, the lowest number in six years and down from 338 last year.

(Diagram: Dollar debt in
defendant by Asian companies fell by a third in the first half of the year,

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