Asia Pacific debt markets: What’s next and what’s needed to remain vigilant

Asia Pacific debt markets: What’s next and what’s needed to remain vigilant

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Nick Atkinson

Nick Atkinson
Asia Pacific Debt & Capital Advisory Leader
Partner, PwC Hong Kong

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.

Resilience through challenge, positive outlook ahead

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: 

  • Consumer demand to bounce back: Asia Pacific is characterised by diversity, featuring both developed and emerging markets, with varying levels of banking sector sophistication and capital market maturity. We expect demand across the region to bounce back across core markets. This is particularly true for those with low US dollar exposures, thus making them less impacted by the currency’s recent appreciation. They have options. They have growth. What may hamper a quick bounce back will be local market protectionism such as trade tariffs and quotas. A recovery could also be hindered by any uncertainties or lingering doubts in lenders' minds on the robustness of enforcement mechanisms in situations of a corporate restructuring or insolvency within particular jurisdictions.
  • Robust Environment, Social and Governance (ESG) demand: There is increasing acknowledgement that ESG is more than reducing carbon emissions - it is also about wider impact. And with increasing demand for green finance to match and align with the strategic goals of businesses, sustainable financing held up well in Asia Pacific last year, especially when compared with the EU and the US. Lenders, particularly banks, are seen to have increasingly higher ESG standards and have tightened lending policies in response to higher expectations from their stakeholders. ESG related bonds and loans are expected to continue their rapid growth in 2023 across the region thanks to strong local demand, a trend towards greater ESG reporting and transparency, and an upcoming pipeline of decarbonisation projects. For instance, China’s pledge to double their wind and solar capacity by 2030 is expected to drive more investors into the carbon transition bond market. However, transition will take time. The pace of rollout and governmental rigour towards transition strategies and policies in those developing markets will also be key.

Regional ESG bond issuance 2021 vs 2022

Source: Refinitiv

  • Loan volume and bond issuance shifts: 2022 represented an improvement over 2021 in debt syndication across Asia Pacific, with lending increasing 3% year on year. 3-4Q 2022 lending saw a nose-dive in volume, with creeping recession concerns reducing capital redeployment into certain regions and industries. However, Southeast Asia saw strong lending growth, with lenders targeting state-owned or quasi-sovereign enterprises for their perceived safety. Asian Investment Grades faced increased competition on the back of dollar appreciation and higher US treasury yields. With a shaky Chinese real estate market, Asian High Yields saw unprecedented outflows as underlying concerns of security enforcement and sovereign defaults scared off bondholders. 

Asia Pacific loan volume and deal count (excluding Japan)

Source: LoanConnector

Asia Pacific local currency bond issuance

Source: Asia Bonds Online, Asia Development Bank | *1H2022 annualized to represent FY2022

  • Evolving markets/increasing complexity and demand in debt capital: Complexity is increasingly becoming a key theme in Asia Pacific debt capital markets as more economies access global capital. Investors are focusing on traditional issues of liquidity and cash flow, but also regional geopolitical and local currency risks. The rise of non-banking financial entities in Asia stands to redefine the debt universe. Increasing amounts of short-maturity bonds indicate investors’ anticipation of higher interest rates against the backdrop of US fiscal policy tightening.
  • Non-bank sector funding: The non-bank sector (i.e., private funds, family offices, asset management firms, etc.) continues to play an increasingly significant part in the provision of finance across Asia Pacific to fund businesses’ operations and growth initiatives. Participants often have greater speed and higher flexibility in making investment decisions than banks. 

What’s needed to remain vigilant

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.

This requires:

  • a more proactive approach particularly in reviewing current cost of capital and constantly adjusting financial planning and budgeting, through benchmarking, industry knowledge, etc.
  • firms to be aware of potential events/trends as well as macroeconomic conditions in the operating sector they are in which will affect their cost of capital, and formulate strategies accordingly.
  • businesses to address ESG front and centre as they set out their financing plans. Beyond environmental issues, governance and social aspects must also be factored in to address the expectations of capital providers, regulators and stakeholders. This will allow businesses to access new sources of funding.

Debt markets are in motion, prepare now

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. 

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