STILL LENDING
Asia and the global liquidity crunch.
By Don Durfee

For something billed as a global liquidity crisis, last month’s credit market upheaval produced surprisingly few casualties in Asia. No local bank has required a bailout. Some companies have had to cancel international bond offerings, but credit – plain bank loans, in particular – remains available and affordable. There’s been no spike in corporate defaults, either. “In general, corporate credit has held up well,” says Ping Chew, managing director of S&P’s Asia credit ratings business.

The contrast with conditions in the US and Europe is stark. There, banks are stuck with US$30 bn in loans they’ve granted but can’t sell on to investors. A number of hedge funds and other financial institutions have run aground. And many dealmakers – both corporate and financial buyers – are having trouble closing their transactions. The scene in Asia is also strikingly different from the crisis of 10 years ago, when companies that paid for long-term plans with short-term loans suffered when local currencies took a nosedive.

These days, Asian companies – like most of their US and European counterparts – have plenty of cash on hand. Bank balance sheets are also healthier. But the real reason Asia has come through relatively unscathed has little to do with fiscal virtue: according to analysts, it’s because the region’s debt markets aren’t as advanced as those in the West.

In the US, banks no longer hold the loans they originate but typically sell them off to investors who chop them up and repackage them with slices of other loans, to be sold in the capital markets as securities. When sub-prime home loans, the basis of many of these instruments, started going bad, it was hard to know which companies and fund managers might go belly up. The result was panic among creditors and a sudden unwillingness to lend.

In Asia, few banks have adopted this practice. (Nor have many bought such securities from US and European markets, with Bank of China and Mitsubishi UFJ being two exceptions.) Indeed, outside of Korea, which has the region’s most developed debt market, banks have few opportunities to do so. Capital markets in Asia remain small and illiquid, says Matthew Austen, managing director for corporate and institutional banking with consulting firm Oliver Wyman. Instead, regular balance sheet lending – where the bank holds a loan until maturity – remains far more common. According to Thomson Financial, Asian companies have US$1.25 trn in outstanding syndicated bank loans and US$2.2 trn in bonds. In the US, those numbers are US$5.39 trn for loans and US$19.54 trn for bonds.

This means that comparatively few Asian companies depend on sources of capital that have vanished. Those that do may be able to turn to the banks, which are so eager for market share that they are still lending at uneconomic (for them, at least) rates. Bram Rosenfeld, Asia-Pacific bureau chief for Loan Pricing Corporation, says that over the next year anything more than an eighth or quarter point increase in the costs of loans is unlikely in Asia.

The lesson from all of this, however, is not that debt capital markets are bad for Asia. Austen argues that bond markets are always more efficient than bank lending, since constraints such as double-taxation and regulatory capital requirements put banks at a disadvantage. In fact, Asian countries should redouble efforts to develop domestic debt capital markets. But they should heed a warning, says Austen: “Sophisticated financial engineering practices can add value, but never give black-box rocket science more votes than common sense when it comes to credit risk management.” That’s a piece of advice that US and European investors would do well to follow, too.