S&P Global Ratings: Local currency bonds set to grow in South-East Asia amid investor scrutiny

PETALING JAYA: After a few bond defaults in the past year in South-East Asia, local currency bonds have attracted stronger investor scrutiny, according to S&P Global Ratings. 

In S&P Global Ratings’ study of 265 of the largest listed corporate bond issuers (excluding financial services) in the region, about 15% show signs of financial fragility, based on public information.
The study was published today in a report titled, “Credit FAQ: What Lies Ahead For Local Currency Bonds In Southeast Asia.

“Despite the closer scrutiny, we expect the use of bonds will continue to grow in the financing mix of companies in South-East Asia,” said S&P Global Ratings credit analyst Bertrand Jabouley.

In the past decade, growth in the corporate bond market was uneven across the region, with the less developed markets, such as Indonesia, Philippines, and Vietnam, having stronger growth in bond issuances.

Jabouley noted: “The degree of development and openness of local economies, together with participation of government-related entities, primarily shape the characteristics of local currency bond markets.” 

Credit metrics suggest that credit quality in the local currency bond markets in the region has broadly stabilised in 2016 compared to 2015. S&P Global Ratings data shows a clear negative correlation between size of the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) and leverage.

The aggregated liquidity (ability to repay short-term debt through existing cash balances and operating cash generation) of the 265 companies appears sufficient, it noted.

Of those companies, 39 are highly leveraged with both an Ebitda below US$200mil and an Ebitda interest cover below 2.0 times.They account for almost US$30bil in total debt, and have largely resorted to refinancing to repay their short-term debt in the past quarters. That indicates their dependence on lenders’ comfort to roll over maturities.

“Although we expect local currency bond markets will continue playing an important role in supporting the resilience of the domestic economy and financial systems in South-East Asia, the transparency of these markets could remain an issue for investors at a time of macroeconomic turbulence and policy uncertainty,” he added.  

We see the possibility for more defaults in local currency bonds, with about 40 companies in our sample with weak credit metrics and a small size, which may complicate refinancing. 

“The most fragile companies in South-East Asia typically have interest cover below 2.0 times, leverage well above 5.0 times, and operations in real estate, energy, capital goods, or construction,” he said.