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Asian Large Corporate Banking March 2012

Asian Corporate Credit Conditions: Clouds on the Horizon?

Asian companies have taken advantage of a prolonged run of strong credit conditions to diversify funding bases by supplementing bank loans with capital markets issues and other sources of funds. Although the credit environment remained favorable across the region last year, new data from Greenwich Associates suggests that, for some companies at least, conditions are no longer improving. On average, Asian companies enjoyed easy access to bank credit and funding from other sources last year. Approximately three-quarters of the large companies participating in the Greenwich Associates 2011 Asian Large Corporate Banking Study said they had no difficulty securing bank credit last year, with another 15% reporting only minor difficulty. Those shares were essentially unchanged from 2010. An additional 71% of companies said they had no trouble accessing funds through the commercial paper market. While that share certainly reflects a favorable credit environment, it was down significantly from the 78% of companies reporting no difficulties accessing funds through the commercial paper market in 2010. One-third of large Asian companies say their access to funding of all types for ongoing operations improved in 2011 and 31% reported improved access to funding for capital expenditures. But as in the case of access to commercial paper markets, there are signs here that
Ability to Access Funding By Type
1% 2011 Bank credit 2010 1% 2011 Commercial paper financing 2010 1% 1% Bond markets 2011 2010 6% 3% 10% 10% 13% 16% 71% 70% 11% 10% 78% 6% 10% 14% 71% 9% 14% 76% 8% 15% 76%

Study Participants
From September to November of 2011, Greenwich Associates conducted 552 interviews in large corporate banking and 148 in debt capital markets with financial officers (e.g., CFOs, finance directors and treasurers) at companies in China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.

credit conditions have begun to moderate. In 2010 only 23% of large Asian companies reported deterioration in their ability to access funds for ongoing operations or CAPEX. In 2011 that share increased to 89%. At the same time, the share of companies reporting improvement in these measures actually declined. In 2010 46% of companies said their ability to access funding for ongoing operations had improved the year before and 43% of companies reported improved access to CAPEX funding. The most dramatic and perhaps ominous changes in conditions were reported by companies in China and Hong Kong/Macau where Chinese banks tightened lending significantly over the course of 2011 as a result of government policies to reign in the countrys fast credit growth. In China the share of companies reporting improved access to funding for ongoing operations dropped to 23% in 2011 from 44% in 2010 while the

2011 Hedging products 2010

1% 2% 4%

16% 13%

78% 78%

9% 1% 2% 2011 3% 10% 4% Very difficult

22% 13% 16% Difficult Average difficulty

62% 63% Minor difficulty Not at all difficult

Equity financing 2010

Note: May not total 100% due to rounding. Based on responses from 148 financial officers in Asia in 2011 and 133 in 2010. Source: 2011 Asian Debt Capital Markets Study

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Access to Funding
Asia Europe 33% 31% 24% 24% 16% 15% 16% 10% 17% 25% 9% 8% 9%

Public Bond Issuance by Asian Companies

Asian bonds 31% 34% 13% 14% 11% 11% 0% 25% 50% 75% 57% 61%

Ongoing operations Capital expenditures Hedging products Structured finance Acquisition finance

8% 9% 11% 10% 11%

U.S. dollar bonds

Asset-backed securities
5%

Euro currency bonds

4%

50% 25% 0% 25% 50%

50% 25% 0% 25% 50%

Decreased/decreased significantly Increased/increased significantly Note: Based on responses from 552 financial officers in Asia and 601 from top-tier companies in Europe in 2011. Source: 2011 Asian and European Large Corporate Banking Studies

Percent of companies that expect to issue in 2012 Percent of companies that issued in 2011 Note: Based on responses from 148 financial officers in Asia in 2011. Source: 2011 Asian Debt Capital Markets Study

share reporting diminished access more than doubled to 20% from 9%. The share of Chinese companies reporting improved access to CAPEX funding fell to 26% in 2011 from 48% in 2010 and the share reporting decreased access jumped to 21% from zero. Similar shifts were reported by companies in Hong Kong/Macau. Nevertheless, credit conditions for large companies in Asia remain much more benign than those facing companies in Europe, where companies on net reported decreased access to funding and financial products for a range of functions, including ongoing operations, CAPEX, acquisitions and others. In Europe, companies that have traditionally relied on bank financing are now opting to tap capital markets for funding that, in the current environment of shrinking bank balance sheets, is often cheaper and more reliable, says Greenwich Associates consultant Markus Ohlig. In Asia, even as companies make greater use of capital markets and other alternatives, the use of bilateral bank credit has climbed steadily as banks compete aggressively for corporate business.
Debt Capital Markets

volume up nearly 14% from 2010 to 2011, according to Bloomberg data. The shares of companies planning to issue bonds in all these markets in the year ahead are slightly smaller, but demand is expected to remain quite strong by historic standards. Of particular note: 26% of companies expect to issue RMB-denominated offshore bonds in Hong Kong, with companies pursuing these transactions in order to take advantage of lower RMB funding rates relative to onshore issues and to settle trade transactions with mainland China counterparties. Such strong demand points to continued growth for a market in which issuance more than quadrupled in volume terms from 2010 to 2011, according to Bloomberg data.
Expected Demand for Funding Reflects Confidence

Relatively high levels of demand for capital markets transactions reflects a general sense of optimism among Asian companies about the business environment for
Need for Funding
Asia Europe 40% 33% 32% 24% 18% 5% 6% 6% 7% 11% 14% 8% 8% 8% 8%

Although the share of Asian companies using debt capital markets for funding declined last year, most of that dip can be traced to a sharp fall-off in the share of companies issuing euro currency bonds. Asian companies pullback from euro currency bond markets contributed to an 11% decrease in Asia ex-Japan G3 currency bond issuance from 2010 to 2011, according to Bloomberg Asia Pacific fixedincome market data. Over the same period, however, the share of Asian companies issuing U.S. dollar bonds actually increased to 34% in 2011 from 30% in 2010 and the share issuing local currency bonds in Asia jumped to 61% from 55%. The growing share of companies tapping Asian markets helped push local currency bond

Ongoing operations Capital expenditures Hedging products Structured finance Acquisition finance

2% 5% 7% 7% 7%

50% 25% 0% 25% 50%

50% 25% 0% 25% 50%

Decreased/decreased significantly Increased/increased significantly Note: Based on responses from 552 financial officers in Asia and 601 from top-tier companies in Europe in 2011. Source: 2011 Asian and European Large Corporate Banking Studies

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Decline in Use of Hedging Products

The results of Greenwich Associates research reveals a meaningful decline in Asian companies use of hedging products last year, including foreign exchange transactions and interest rate derivatives. The share of Asian companies employing foreign exchange declined to 87% in 2011 from 91% in 2010, and the share using interest rate derivatives dropped to 32% from 37%. These declines reflect the challenging conditions many Asian companies faced last year, including high levels of currency volatility and the dramatic strengthening of the U.S. dollar against many emerging market currencies that took many companies by surprise, explains Greenwich Associates consultant Fion Tan.

Willingness of Banks to Extend Credit (point score out of 100)

Japanese banks 65

Asian banks

63

U.S. banks

63

European banks 0 25 50

59 75

Product Use Percent of Respondents

Bilateral credit 42% 40% 40% 39% 41% 28% 33% 34% 27% 87% 91% 84% 32% 37% 32% 8% 8% 9% 27% 22% 19% 8% Equity capital markets 19% 14% 0% 25% 50% 75% 100% 82% 77% 73%

Note: : Evaluations are based on a 5-point scale from 5 Excellent through 1 Poor with a point score that weights those evaluations as follows: 100 excellent, 50 above average, 25 average, 12.5 below average, and 0 poor. Based on responses from 551 financial officers in Asia in 2011. Source: 2011 Asian Large Corporate Banking Study

Syndicated credit Funding Structured finance transactions

Debt capital markets

their success in winning business and relationships with Asian companies. The only factor that even compares to credit availability and pricing in these terms is financial stability, and all three of these considerations are increasing in importance to companies relative to banks capabilities and service quality.

Foreign exchange

Greenwich Recommendations

Hedging

Interest rate derivatives

Commodity derivatives

M&A advice

2011 2010 2009

In a finding that might surprise some treasury officers, Asian companies rate Japanese banks as being the most willing to extend credit and the most competitive in their pricing. With European banks pulling back on balance sheet commitments, Greenwich Associates recommends large Asian companies contact Japanese banks to inquire about lending policies and terms. This could represent a new and important alternative source of financing for growing Asian companies.

Note: Based on responses from 551 financial officers in Asia in 2011, 562 in 2010 and 561 in 2009. Source: 2011 Asian Large Corporate Banking Study

Most Competitive Pricing

2012 and their subsequent need for funding. Although there is widespread concern that economic growth rates are slowing in Asian countries, one-third of Asian companies report increasing need for funding for capital expenditures, and 40% say they have growing need for funding for ongoing operations. In both categories the share reporting declining need for funding is 5% or less. This sustained need for financing has kept Asian companies focused on credit. Banks willingness to extend credit at competitive prices is by far the biggest determinant of

Japanese banks

50%

Asian banks

36%

U.S. banks

36%

European banks 0% 20%

30% 40% 60%

Note: Based on the weighted average percentage of respondents rating banks from the region as most competitive in pricing. Based on responses from 551 financial officers in Asia in 2011. Source: 2011 Asian Large Corporate Banking Study

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Consultants Markus Ohlig and Fion Tan specialize in Asian corporate banking and finance.
Methodology

From September to November of 2011, Greenwich Associates conducted 552 interviews in large corporate banking and 148 in debt capital markets with financial officers (e.g., CFOs, finance directors and treasurers) at companies in China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Subjects covered included product demand, quality of coverage, and capabilities in specific product areas. The findings reported in this document reflect solely the views reported to Greenwich Associates by the research participants.

They do not represent opinions or endorsements by Greenwich Associates or its staff. Interviewees may be asked about their use of and demand for financial products and services and about investment practices in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and reviews for presentation purposes in order to produce the final results.
2012 Greenwich Associates, LLC. All rights reserved. No portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties or publicly without the permission of Greenwich Associates, LLC. Greenwich Associates, Competitive Challenges, Greenwich Quality Index, and Greenwich Reports are registered marks of Greenwich Associates, LLC. Greenwich Associates may also have rights in certain other marks used in these materials.

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