No end in sight for cash crisis
Analysts warn that the high cost of borrowing will continue to cause liquidity problems for many companies. Reports by Amanda Lee

The Federal Reserve will spend up to US$300 billion over the next six months to buy government bonds in an effort to stimulate borrowing.

Borrowing in United States dollars will continue to be costly this year. Together with the poor trading environment, market participants expect more companies to experience financial difficulties.

The US Federal Reserve announced that it will buy up to US$300 billion in long-term government bonds to help bring down yields and borrowing costs.

But analysts do not expect quick relief for borrowing, particularly in the troubled mortgage sector, as a result of the purchase of government debt.

"It will depend on evidence that banks on Wall Street and in London have honestly wiped their balance sheets clean," said Brayan Lai, a credit analyst at French investment bank Calyon.

The majority of corporations in Hong Kong borrow in both US dollars and Hong Kong dollars. Although borrowing costs have come down from the end of last year, it is still significantly more expensive to borrow than it was in the past five years when the market was bullish, according to Mr Lai, referring specifically to Asian lenders outside Japan.

"In the foreign markets, credit spreads remain elevated due to declining fundamentals, and the negligible likelihood of fundamental credit upside," Mr Lai said. "Another reason is the lack of significant market-making activities and lower risk appetite among institutions."

Liquidity is less tight in Asia in local currency terms in comparison because the majority of regional and mainland banks are in better shape. There has been relatively more focus on traditional lending than on securitisation and collateralised debt obligations among Asian lenders outside Japan, he said.

But it could be all down to relations between lenders and borrowers. "There is at least onshore local credit available, which acts as an offset against the scaling back of offshore investors," Mr Lai said. "I find many local corporates have support from their relationship banks."

There have been substantially fewer transactions in the syndicated loans market. Although banks are still willing to lend, most recent transactions were bilateral loans. Globally, the issuance of syndicated loans has fallen this year by more than 50 per cent to US$229.4 billion compared with the same period last year. For Asia, excluding Japan, total issuance so far is US$12.2 billion - down by 80 per cent from last year, according to figures provided by Thomson Reuters in March.

"Pricing of margin for HK dollar loans and US dollar loans has gone up by three to four times in the past 18 months or so," said Lisa Chung, a partner at law firm Slaughter and May.

To secure a loan, borrowers will have to pledge some assets as collateral. Some of these assets, such as second-line stocks, have become illiquid or have been significantly marked down in the market - all these have made it more difficult for companies to raise capital.

"Another type of asset that has suffered mark-downs is property. And for unsecured loans, lenders are now asking for more buffers," said Andrew Lam, assurance partner at consultancy firm Grant Thornton.

Lower pricing of shares in the market has made equity financing using initial public offerings (IPOs) or right issues unattractive. "Issuing new shares right now is not ideal. The pricing of shares is lower, so if you want to raise the same amount of capital, you will have to issue more shares, which will dilute the value of existing shares," Mr Lam said.

Figures from Thomson Reuters showed that global IPO issuance in March stood at US$1.3 billion, a decrease of 97 per cent compared with last year. In Asia, excluding Japan, the total issuance was US$300 million, a decrease of 98 per cent. Issuance in all equity capital markets amounted to US$50 billion - a decrease of 60 per cent - and in Asia, excluding Japan, it amounted to 18.2 per cent, a fall of 54 per cent.

"Over the past six to nine months, we have seen both listed and private companies, big or small, getting into financial distress," said Mr Lam, adding that it didn't look like recovery was around the corner.

Some companies have already been forced to liquidate and many of these firms had to restructure their debt arrangements. This meant there were plenty of merger and acquisition opportunities for cash-rich white knights looking for attractive targets at reasonable prices, Mr Lam said.

"There is a lot of restructuring and recovery going on behind closed doors," he said. "But the restructuring is only a small percentage of the whole problem."

Trading for most companies was becoming more difficult, he said. Increasingly, companies are finding their debtors delaying payment and their creditors are not as willing to grant long credit periods. This will continue to cause liquidity problems for all firms.

SCMP
1st April, 2009

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