BUSINESS: Asia's working capital crisis
Far Eastern Economic Review
Dec 11, 1997
Even good Asian firms
are having trouble raising funds
* By Salil Tripathi in Hong Kong
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
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
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
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
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
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
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
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
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
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
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
Examples include Indonesian pu and paper maker Pindo Deli, which
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
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
American 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.