September 9, 2010 5:37 pm

Bank liquidity in Asia boosts funding for businesses

 

A strong, region-wide economic recovery has made it easier for medium-sized companies in Asia to find capital, whether from banks or from growing debt markets, bankers say.

While European and North American economies continue to struggle, Asian countries have regained their footing, which has lowered borrowing costs and made banks more willing to lend money to their local corporates.

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“The loan market is much healthier than it was in early 2009. It took until the second quarter of 2009 to reactivate after the crisis, but since then it has grown steadily and, this year, volumes are up substantially,” says Phil Lipton, managing director and head of syndicated finance in the Asia-Pacific region at HSBC.

Growth in Chinese bank lending cooled earlier this year following sharp rises in late 2009. Higher reserve ratio requirements and other lending restrictions trimmed loan growth to 21.5 per cent in May, down from 31.7 per cent in December 2009. Growth in the small business sector is important for the overall health of Asian economies, with the Asia-Pacific Economic Co-operation forum estimating that small and medium-sized enterprises account for more than 90 per cent of all businesses in the region and employ 60-80 per cent of the workforce.

Bankers say local banks have taken over a larger share of the syndicated loan market from international players, and that in many cases these banks are more confident to lend to companies that might otherwise have trouble finding capital because they better understand regional market conditions. Local banks are also becoming more involved in cross-border financing for trade-related needs or for capital investment.

“The funding costs between Asian banks and those in Europe or the US are as different as night and day,” says Guy Wylie, head of Asian debt capital markets at UBS. “Banks across the region are highly liquid because of their growth in deposits and because they were not caught up in the recession as badly.”

Standard Chartered last month said it was buying GE Commercial Financing Singapore, an SME-focused financing business, as it tries to strengthen its SME financing services in the region.

Asian corporate bond markets have seen strong growth in recent years, creating a new source of capital that was not nearly as accessible before the financial crisis.

“There’s a lot of bond issuance across the markets from banks to corporates, everything from highly rated corporates to small, high-yield deals. Because the bond market is so hot right now, it has taken a lot of the borrowing needs out of the banks, even though they remain very liquid. There’s more demand from lenders than there is supply at the moment,” Mr Wylie said.

The local currency debt markets, in particular, have grown in size, and for those companies that want to borrow in dollars, there are active swap markets for conversion.

“The Asian local-currency bond market has continued to grow year on year, even through the crisis and financial turmoil,” says Rod Sykes, managing director and head of debt capital markets for Asia Pacific at HSBC. “It has become an important source of capital for people when the G3 markets are not there for long-dated financing.”

However, that market remains off limits to small companies that are not publicly listed or that have long credit histories, although in stronger market environments some of the best medium-sized companies have been able to tap the bond market.

Indian regulators have for some time been pushing exchanges to do more for SMEs to help them access capital. The Bombay Stock Exchange said last month that it would launch a separate platform for SMEs by the end of the year. India’s National Stock Exchange and MCX Stock Exchange have also shown interest in setting up such special platforms for smaller companies.

Not only have financing options changed since the crisis, but the mind-set of SMEs towards finding a balance in their funding mix has also shifted.

“The crisis made people relearn the lesson of having an appropriate capital structure,” says Mr Sykes. “It really has driven home the importance of having a sustainable and sensible capital structure, from debt/equity ratios and the maturity profile to not having an overreliance on one form of funding over others. Upper-middle-sized corporations are showing increasing levels of sophistication and using multiple tools to provide themselves with a sophisticated capital structure.”

He adds: “Companies are focusing on refinancing early rather than waiting. With the current volatility, you can’t be sure that the market will be open on any given day, month or even for large parts of a year.”

But not everyone is that optimistic. Some say that while financing has become easier for the recognisable corporate names, smaller companies continue to struggle.

“Comparatively speaking, yes, financing has become easier. However, if you just have a normal small business that isn’t creative or something very new, it can still be very hard to get financing,” says Albert Lau, vice-chairman of the Hong Kong Small & Medium Enterprises General Association. “It’s not uncommon here for smaller companies to borrow from friends and family.”

Bill Morrow is the founder of Angels Den, which matches private financiers seeking investment opportunities with companies in need of capital. Mr Morrow says his company speaks to 200 SMEs across Asia every week, and what he has heard does not match the talk of increased liquidity.

“There’s a fair bit of talk of liquidity, but if you’re a medium-sized company you’re hard-pressed to get funding from a bank without giving up your first-born child as security,” he says.

The Credit Bureau (Singapore) earlier this year launched a “blended” credit score aimed at SMEs, saying it should help solve their chronic problem of getting access to capital. A credit score helps address an SME’s shorter credit record.

Angels Den has big expansion plans in Asia, moving into Hong Kong, Malaysia and the Philippines. It is already operating in Singapore. Mr Morrow says that while he has found eager investors in all those markets, he encounters many companies that have trouble thinking beyond their local bank when it comes to financing options. And the companies tell him the banks are reluctant to lend.

“The risk profile has changed dramatically. Banks are now taking more collateral for that debt, and they are lending a smaller amount against their balance sheet,” Mr Morrow says.

“Even if the banks were to increase lending tenfold, they still a lot of deficit to catch up on because they haven’t been lending for the past two years.”

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