BUSINESS: Asia's working capital crisis
Far Eastern Economic Review
Dec 11, 1997

Crunch Time:
 Even good Asian firms are having trouble raising funds
  * By Salil Tripathi in Hong Kong
    1097 Words

 When Thai pulp and paper maker Advance Agro wanted to raise $150 million for a new paper mill early this year, bankers expected that selling its bonds would be a piece of cake. Asia was still hot, paper demand was rising, Asian paper companies had a solid credit record, and Advance Agro was sound.  Months later, in mid-November, the company is paying the price for the world's loss of confidence in Asia. Although its export-driven business gives it a natural hedge against a lower baht, the demand for Advance Agro's bonds was so weak that the firm had to trim the issue's size to $111 million. And it ended up having to pay investors interest
of over 15%-junk-bond levels. That left it with only $100 million after costs -- one-third less than it wanted, and at much greater expense. Advance Agro had no choice. "Many have asked us why we are issuing the bond now," Deputy Managing Director Paisan Srisaan said at a Hong Kong road show ahead of the bond launch. "But our expansion plans cannot wait, and we have to follow our strategy, even though this is going to cost us a lot."   As Advance Agro's case ably demonstrates, these are tough times for Asian firms trying to raise money. Stockmarkets are down, banks are raising interest rates, some finance companies have almost collapsed and bond investors are demanding exorbitant rates of return. The evaporation of credit is hurting companies at every level. It makes it hard for
healthy firms to inject new vitality into Asia's faltering economies, and it means some troubled companies can barely stay afloat.   The crunch has led to:   -- Postponed investments: The Gas Authority of India was going to use the proceeds of an $800 million issue of global depositary receipts -- shares traded outside their country of origin -- to build a pipeline network in the country. But the company now says the issue has been dropped because of sluggish conditions for an equity issue. And the pipeline? Back on the drawing board.   Others have been hit too. South Korea's Samsung group announced on November 28 that it would postpone plans to expand its new car-production plant because it couldn't get fresh loans from creditors. Firms in a range of overcrowded industries may have similar problems.   -- Delayed debt repayments: South Korea's top 30 business groups astonished bankers on November 27 with a plea for a moratorium on corporate debt repayments until the beginning of 1998. Claiming that it was virtually impossible for them to get more credit from banks, the giant business groups asked that payments on around $21 billion in borrowings that come due in December be put off at least until the beginning of January.    -- Sellouts: Many debt-ridden Thai banks and finance companies are talking to foreign institutions about selling stakes or even entire operations. These discussions are complicated by Thai shareholders' fears about giving up control, and wrangling over how much the institutions are worth.    -- Liquidations: Hong Kong's Yaohan chain of supermarkets closed shop in late November, as did Japan's oldest brokerage, Yamaichi Securities. Both had lost the ability to make their debt payments because credit sources had run dry.   The crunch hits almost everyone, says Sriyan Pietersz, head of research at SocGen-Crosby in Bangkok. Even good companies are having trouble borrowing for their working-capital needs. After Advance Agro's tough bond sale, Pietersz predicts that other Thai companies will have similar problems raising money: "Very few companies can mobilize funds now," he says.    With finance companies on the mat, Thai firms are having to turn to banks. But the companies negotiate from a position of weakness, since the banks know they have no other recourse. Companies also run into risk-shy lenders who have been bitten badly by the bad lending decisions they made in the past. Pietersz says banks are demanding access to a company's cash flow as a guarantee of payment. And as Christopher Bielenberg, chief executive of the London-based accounting consultant REL, observes, few Asian companies these days have much cash on hand to put up. Even when companies manage to get a loan, it's likely to be expensive: Thailand's posted prime rate has risen to 14.5%, forcing some firms to borrow at 19%. And some lenders are simply avoiding Asian companies altogether. "We are not offering any new lines of credit," says a French banker on a mission to examine his bank's exposure to Asia. "All lines were withdrawn in October. We only lend to known clients with counter-guarantees in Paris."   What happened to create this sad state of affairs? Companies who have borrowed recklessly for years aren't blameless. And the lack of transparency that plagues corporate accounting in many Asian countries continues to keep bankers in the dark about just how bad the credit risks are. "The anxiety in banking circles is very real," says a Hong Kong-based investment banker. "It is the fear of the unknown."   Yet it's not all gloom and doom. A small handful of companies continue to raise money through bond deals and loans: smart Asian firms that have solid finances which have been through the rigorous screening of investment banks, legal firms and credit-rating agencies. The key? V. Shankar, managing director of Bank of America's investment-banking division, lists transparency, track record and access to a wide range of financing sources.   Examples include Indonesian pu and paper maker Pindo Deli, which in late September raised $750 million from bonds with maturities stretching up to 30 years. Or Asia Pu & Paper, another Indonesian firm, which had a similarly successful $250 million equity-linked bond issue in November. India's Reliance Industries got a $300 million loan in September to build a refinery -- heed by its record of never having missed a payment on several bonds issued in recent years.   But while companies can control their own bottom lines, they can't control their external environment. Advance Agro, for instance, also has a solid track record and a still-growing paper business. But it has
suffered from global investors' general lack of confidence in Thailand. Within the region, Thai firms have to pay the highest premiums to get investors to buy their bonds (see chart).   For Asian firms, then, the important thing is rebuilding confidence. "What Asian companies will have to do is what Mexico did," says an America  banker in Hong Kong. That means credibility-boosting steps like offering short-term bonds and making sure every payment is made. It also means more transparency. And until that happens, money won't come cheap for Asia's companies, good or bad.