The tide of U.S. dollar liquidity is flowing slowly back to Asia. That flow seems to benefit mainly the larger, financially stronger companies or those with government ownership, but we are now seeing early signs of a reopening to select speculative-grade Chinese developers. However, swathes of issuers remain locked out of fresh dollar funding, and S&P Global Ratings expects this market will be split between haves and have nots until there is greater visibility on post-COVID conditions.

The U.S. dollar bond market has been a useful avenue for global investors to access credit risk in Asia, especially in China, and South and Southeast Asia. For some issuers, especially speculative-grade companies, U.S. dollar liquidity has also been an important source of funding for capital investment and refinancing.

S&P Global Ratings rated nearly US$160 billion of new U.S. dollar debt in 2019 from Asia-Pacific issuers, up almost two-thirds from the start of the decade, with issuers increasingly drawn by the offshore market's deep liquidity and ease of access.

Depending on the geography, U.S. dollar bonds can account for 25%-75% of funding for rated Asian firms, more so in countries with less-deep financial markets, such as Indonesia. If foreign currency capital markets stay shut, some firms will encounter refinancing problems, increasing default risk, especially ones that need to fund capital expenditure.

The region's firms were unable to raise dollar debt for about five months after the collapse of Lehman Brothers, in September 2008, as a point of comparison. A surge of downgrades followed (see chart 1).

Chart 1

U.S. dollar liquidity left Asia in March as the outbreak prompted traders to pull dollars from emerging markets in favor of ultra-secure investments, such as U.S. Treasuries (see chart 2.)

Chart 2

Investment-Grade Issuers Continue To Access Dollar Debt

After a multi-week lull, there's been a flurry of issuance from investment-grade names. Bond prices are recovering and spreads are tightening (see chart 3).

Bond prices globally recovered following two actions by the U.S. Federal Reserve. On March 23, 2020, the central bank directly entered credit markets using new liquidity facilities, buying investment-grade corporate bonds for the first time since the global financial crisis. On April 9, 2020, the Fed announced it would expand its facilities to include purchases of speculative-grade issuers for the first time (see "FAQ: How The Fed Changed The U.S. Corporate Funding Landscape," published April 24, 2020.) The events corresponded with gains in Asian corporate debt prices (see chart 3).

Chart 3

Recent deals include a US$600 million bond guaranteed by China-based Xiaomi Corp. (BBB-/Stable/--) and a US$500 million issue from Korea East-West Power Co. Ltd. (AA/Stable/--).

Well-established Hong Kong companies have also raised long-term money with CK Hutchison Holdings Ltd. (A/Stable/--) closing a US$1.5 billion offer with a 30-year tranche, while Sun Hung Kai Properties Ltd.(A+/Stable/--) raised US$500 million for 10 years.

Demand for dollar paper issued by state-owned names has also been resilient. The Malaysian oil firm Petroliam Nasional Bhd. (PETRONAS; A-/Stable/--) raised US$6 billion in mid-April and the Chinese oil giant China Petrochemical Corp.(A+/Stable/--) closed a US$3 billion bond in early May, amid plummeting oil prices and high anxiety about the outbreak.

This is reflected in the data, which show that investment-grade and higher-quality unrated names have continued to access dollar bonds during March-April, when volumes from speculative-grade names in Asia tumbled (see chart 4).

Chart 4

The Case Of Chinese Property Issuers

So dollar liquidity is available to some. To understand which Asian firms may be able to access offshore debt markets now, it's helpful to look at property firms in China--a class of mostly speculative-grade issuers that frequently tap dollar debt.

On May 15, Zhenro Properties Group Ltd. (B+/Positive/--) priced a US$200 million deal at 3.8 years.

Further signs of a reopening was seen with a US$544 million issuance from Country Garden Holdings Co. Ltd. (BB+/Stable/--) of 5.40% senior notes due 2025, which was well oversubscribed. In addition, US$150 million debt from Redco Properties Group Ltd. (B/Stable/--) was priced tighter than that of initial guidance. Both offers were completed on May 20, 2020.

We rate more than 60 Chinese developers, many of which issue frequently. This gives the investor community plenty of data points on which to trade and price new bonds. The issuers also tend to be listed on stock exchanges, meaning there is often sufficient analyst coverage, operational information, and audited financials. Given the depth of the sector, we believe cross-border investors will continue to watch the asset class.

The industry generates about one-quarter of Chinese GDP, by some estimates. The government views the sector as crucial to the economy, particularly in a recessionary climate, in our view.

During this crisis, the Chinese government has backed corporates by injecting liquidity to the order of Chinese renminbi 3.3 trillion (US$465 billion) into the banking system since the outbreak began, according to the International Monetary Fund. The government also made cuts to the reserve requirement ratio. This freed up capital for investments.

Issuers also tell us that regulators have sped up approvals for bonds. This has allowed domestic issuance to supplant offshore markets as developers' main source of non-bank funding during the crisis. While Chinese developers raised seven times more in the dollar bond market than domestically in January, by April issuance in renminbi bonds was 50 times greater than that raised in dollars.

Issuers' ability to continue to tap the domestic bond market has alleviated refinancing pressure since the load of maturities was heavy for many developers. (see chart 5).

Chart 5

The Case Of Southeast Asian Issuers

Access to the debt capital markets is likely to remain solid amid the pandemic for larger companies in Southeast Asia with conservative balance sheets or government ownership. On the other hand, we believe access to the markets will be much more challenging for smaller, more leveraged issuers in operationally challenged sectors such as real estate, manufacturing, or commodities.

Southeast Asia's investment-grade corporate issuers seem to be coming through the pandemic with little loss of access to dollars. There are also only a limited number of such issuers and they command rarity value among the international funds.

The US$6 billion deal by PETRONAS in mid-April, for example, was well subscribed. The offer was also long dated, split into 10-, 30-, and 40-year tranches.

But swathes of regional issuers still find it difficult to issue offshore. We see vulnerability among some of our rated Indonesian issuers, for example.

Prior to the pandemic (in November 2019), we had negative outlooks on the ratings on 16% of the Indonesian firms we rate. That figure has since widened to about 35%. Excluding state-owned enterprises, we have negative outlooks on the ratings on almost 40% of Indonesian corporate issuers we rate.

Indonesian issuers with highly concentrated businesses or those with refinancing needs in 2021 and 2022 are most exposed. We have negative outlooks on 80% of the ratings on the Indonesian property developers we rate for example.

Indonesia's speculative-grade issuers have historically been exposed to the ebbs and flows of the sentiment of offshore investor sentiment. They use U.S. dollar funding partly because they have limited funding options at home, unlike Chinese issuers or companies in Malaysia or Thailand.

That structural dependency is unlikely to change over the next two years. Asian Development Bank data say that Indonesia's local debt market only addresses about 2.8% of bond funding raised by domestic firms. About one-third of Singapore's corporate debt is raised onshore, by comparison, and fully half of corporate issuance in Malaysia is domestic.

Nor can Indonesian issuers easily replace that capital with bank loans. We believe Indonesian banks will be increasingly cautious on extending new loans to new customers, given the fragility of business conditions since the outbreak began and rising nonperforming loans.

For example, we lowered the ratings on Indonesian developer PT Alam Sutera Realty Tbk. (CCC+/Negative/--) to 'CCC+' due to the company's difficulty in refinancing its US$175 million notes due April 2021.

We noted that the issuer has been unable to fully refinance its upcoming 2021 bond with domestic bank loans, and was only able to secure Indonesian rupiah 700 billion (US$46 million) in combined loans through two banks, in early March 2020 (see "PT Alam Sutera Realty Tbk. Downgraded To 'CCC+' On Heightened Refinancing Risk; Outlook Negative," April 30, 2020). This fundraising also took several months to close, underlying the difficulty that even well-established companies can have in tapping the domestic banking market.

Dollars Are Back, But Are The Fundamentals?

Dollar liquidity does seem to be coming back to Asia, but in patches. State-backed, investment-grade names seem to have an easier time. Speculative-grade entities with limited funding options, little government support, and uncertain business outlook are taking a longer time to access markets access at costs available pre-pandemic.

The difference for this crisis may be that issuers may need a long time to restore their businesses. Dollar liquidity may come back swiftly. Profits and sales may not.

The outbreak may depress revenues of issuers across the manufacturing, commodities, real estate, and retail sectors well into late 2020, with defaults along the way. Operations may be highly sensitive to the containment measures, and government stimulus and support to counter such impact, but the challenge for investors and us is that these have yet to play out.

The first-quarter results for some Asian issuers hardly reflect the full effects of the pandemic. And many of the region's lockdown measures continued well into the second quarter.

S&P Global Ratings has taken negative rating actions on 167 firms across Asia-Pacific since the outbreak began, of which 45 were CreditWatch placements. We will likely resolve most of these CreditWatches by July, which may be followed by more rating actions.

The split market is likely to continue so long as recessionary conditions persist. Capital providers are likely to stay on the sidelines in sectors directly affected by the pandemic until they have better visibility on the revenue and profit impact of the various lockdown measures. Second-quarter results may shed some light on this situation, but these are still two to three months away.

In the meantime, poor market sentiment, weak domestic bond market, and slender bank appetite for lending in places such as Indonesia will raise questions about an entity's liquidity, a growing focus point for investors. For such firms, dollars do not seem to be forthcoming.

Our view is that some Asian issuers will continue to be sidelined from dollar bond markets because of fundamental business challenges, regardless of available market liquidity. Fundamentals ultimately will likely be the bigger driver of ratings although liquidity can prove to be a problem lower down the credit spectrum.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Appendix

Table 1

Related Research

• Trends: Potential Fallen Angels Hit A Record-High 111, May 15, 2020
• China Evergrande, Hengda, Tianji 'B+' Ratings Affirmed On Lower Refinancing Risk, Good Sales Inflow; Outlooks Stable, April 29, 2020
• Various Rating Actions Taken After Reassessment Of Support For Indonesian Government-Related Entities, April 27, 2020
• Credit Conditions Asia-Pacific: COVID-19: Flatter Growth, Tougher Recovery, April 22, 2020
• Up Next: The Complicated Transition From COVID-19 Lockdown, April 17, 2020
• China Developers' 2019 Results Expose Strains Before COVID-19 Crisis Hit, April 8
• S&P Crunches The Data On Indonesia Inc.'s Tough 2020, April 2, 2020
• New Virus, Unprecedented Risks For China's Developers, March 2, 2020
• China's Illiquid Developers Ask, How Long Will The Coronavirus Crisis Last?, Feb. 3. 2020

Writer: Jasper Moiseiwitsch