Amid Economic Downturn, Asia Companies Maintain Optimism

New Study Shows Asian Companies Experiencing Fewer Credit Disruptions than Corporates in Europe and U.S.

As the global economy slides toward recession, companies in Asia continue to invest in their businesses and report that the credit environment across the region remains more benign than in Europe and the United States, according to a new Greenwich Associates Market Pulse.

Asia’s economic prospects are without a doubt uncertain. As recently as October 22, the head of the Asian Development Bank tried to reassure Asian markets by reiterating that the region was on track for 7% growth in 2009, despite the severe downturn in the U.S. and European economies and the recent announcement of South Korea’s $130 billion rescue package for its ailing banking sector. The preliminary results of Greenwich Associates’ 2008 Asian Corporate Banking Study suggest that companies across the region agree that local economies will overcome significant headwinds and continue expanding over the next year.

“In part, this optimism seems to arise from the fact that credit conditions for Asian companies do not appear to have deteriorated to the extent that they have in Europe and the United States — at least to this point,” says Greenwich Associates consultant Markus Ohlig.

Signs of Tightening

The Greenwich Associates research results do reveal signs that companies are beginning to feel the pinch of the global credit contraction. Most tellingly, 45% of companies say their need for funding for ongoing operations is on the rise. However, additional data indicates that reductions in credit availability are — as of mid-October — limited to a relatively small segment of Asian companies, as opposed to being widespread across the region. Although about one in five companies in Asia says its ability to access funding for ongoing operations has been curtailed by the market dislocations, an equal proportion of companies say their access to operational funding has actually improved in recent months. “By way of comparison, nearly a quarter of European companies say their ability to access funding for ongoing operations has been curtailed,” says Greenwich Associates consultant Markus Ohlig.

The story is much the same with regard to companies’ ability to secure structured financing: While the environment might not be entirely rosy in Asia, it is nevertheless much more favorable than in other regions. Among Asian companies, there is an even split, with 13% saying their access to structured finance products has increased in recent months and an equal share saying it has been reduced. By comparison, European companies show an 18% decrease in recent months with 11% showing an increase. In the United States, half of large companies say their ability to access structured finance has been diminished and only 2% say it has been enhanced.

In general, Asian companies have drawn down a higher portion of their outstanding credit lines than have their counterparts in the west. However, overall levels of credit use are up only modestly over the past 12 months. Asian companies in September and October 2008 report that they have drawn down half of their available credit lines on average, up from 47% in 2007. By way of comparison, European companies have used about 41% of their available credit.

The Greenwich Associates research yields one additional finding that suggests Asian companies are feeling new pressure to take action to secure their credit lines: The proportion of Asian companies saying that their need to preserve access to credit restricts their ability to select capital markets underwriters and merger & acquisitions advisors strictly on the basis of merit increased to more than a quarter in 2008 from just 17% in 2007.

Credit Availability and Demand

At the same time, Asian companies are much more likely than companies in Europe or the United States to say their demand for essential banking products is on the rise.  In particular, Asian companies report increasing levels of demand for capital expenditure financing — an indication that they expect continued business expansion in coming months. Forty-two percent of Asian companies say their need for cap-ex funding is increasing in the current market, while only 7% say it is decreasing. In Europe, only 10% of companies say their need for cap-ex financing is on the rise and about the same proportion say their need for such financing is declining. In the United States, 16% of companies say their need for capital expenditures financing is falling, with only 13% say it is increasing.

“Asian companies also report increasing levels of demand for hedging products, which could be seen as another indication that they continue to invest in their businesses,” says Greenwich consultant Abhi Shroff.  “Based on these results, it appears that companies in Asia are much more optimistic than companies in Europe or the United States about prospects for future growth.”