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Asia Pacific debt is primed for rapid changes in structure and origination. Those looking to succeed must prepare now and be ready to challenge traditional ideas of how the region’s vast and diverse debt capital markets operate.
In recent years, the Asia Pacific debt markets - and businesses, CFOs or treasurers looking to access traditional banking markets - have continued to weather many storms. Public markets have been impacted by uncertainty brought on by COVID-19, increased complexity in geopolitical tension, sovereign defaults and a real estate crisis in the region’s largest economy, China.
Compounding these issues is additional turbulence in the region’s debt markets. A gloomy global outlook - especially in the US and Eurozone – is causing a spillover effect to the rest of the world. Rising interest rates and high inflation continue to challenge the market, making borrowing more expensive and lenders more cautious when it comes to assessing cash flow and risks. This is creating greater complexity around where to go to find capital, and what the costs of that capital may be. It’s also setting the scene for more stressed and distressed situations, as well as restructurings in the market as maturities approach.
Recent collapses within the banking industry have also caused ripples in the debt markets. Historically, in times of financial instability, there is a movement away from national boundaries to establish a paradigm of calm in the market. Typically, this is achieved through interest rate cutting to boost purchases, which hasn’t happened this time around and perhaps explains why more businesses are content to just sit and wait. For some, however, there is a sense of opportunity. For example, regional banks looking to create a global presence can now step into new markets and provide an optionality on liquidity to borrowers.
Despite this backdrop of uncertainty, turbulence and change, the Asia Pacific debt markets have continued to prove their adaptability and resilience.
Asia Pacific will remain the ‘sweet spot’ for global growth. Whilst Merger & Acquisitions (M&A) by value dropped by 33% in the region in 2022 following the record high in 2021, activity remained in line with pre-pandemic levels. And the regional economy should provide an attractive backdrop for the debt markets. Its easing economic headwinds are making way for stronger recovery: China and India are expected to contribute to half of global growth this year, while Southeast Asia will make up another quarter. This is boosted by China’s reopening and inflation passing its peak, driving commodity costs down.
With this in mind, looking ahead, there are several key trends to watch:
The ever-changing capital landscape demands experience and resilience to successfully navigate the key trends and challenges at play. With so many varying factors – from the market, to the industry, to a corporate’s development stage - there is no one ‘golden rule’ for how to do this. However, businesses that consider their entire strategy when assessing their capital structure are better positioned to achieve an optimal mix of capital. By doing so, they can minimise the total cost of capital and maximise enterprise value. Also, taking a strategic and integrated approach is critical for businesses to ensure liquidity and enhance the ability to be prepared for the unexpected.
It is expected the debt market will continue to grow in the coming years, driven by the region's strong economic backdrop and increasing investor demand. As with any market, there are risks and uncertainties as well as key trends to consider. For those looking for new funds to refinance existing facilities or minimise risk, or maximise the funding options available to you, it is crucial to be ready for changes the market may bring. It is imperative to prepare ahead for your financing maturities. Don’t wait. Prepare now.