debt markets low-key affairs until three to four years ago as there was simply
no appetite for such debt being purchased so soon after the mangling given to
creditors by cases such as the one I described above.
Asian banks and no-man's land
The upshot therefore, was counter-intuitive; the absence of any market for
unsecured debt meant that family-controlled companies actually became larger
and more important to the Southeast Asian economy in the years after the Asian
crisis. In the years afterwards, their failure to change their business
practices and embrace corporate reform would eventually cause the very steps
that led up to their current crisis.
One of the most important questions about the current credit crunch was the
reason for Asian banks to lose billions on their investments in the US and
European debt. Much of the blame can be laid at the doors of the very
conglomerates that ushered in regional prosperity in the years before.
The experience of the Asian crisis meant that banks remained largely unwilling
to lend on an unsecured basis to regional businessmen, creating a vast gap
between what could be banked (and hence rather cheaply financed) and everything
else (expensive to finance).
Additionally, the focus of bankers on asset-based lending meant that growth
businesses in the services space were left largely underfinanced; in turn, this
left Asia dangerously reliant on manufacturing exports even as the global
economy started heating up in 2004.
Without the credit skills required to navigate their way through growth
businesses, Asian bankers preferred to embrace the devil they knew, namely
mortgage debt. That explains the billions of dollars squandered by the region
on rated mortgage securitization issued by US banks and agencies; the losses on
these activities are already horrific but would have been a whole lot worse if
the struggling US mortgage guarantors Fannie Mae and Freddie Mac had defaulted
on their debts (as credit metrics warrant). In the event, the US government
decision to rescue these agencies meant a reduction in mortgage losses.
Meanwhile, foreign creditors came back to their habit of financing Asian growth
stories by structuring and buying billions of high-yielding debt from the
region. Often, these bonds were enhanced by participation in equity or by
collateralization; despite the very poor precedents set in Asian courts in the
aftermath of the Asian financial crisis.
Thus it was that when October 2008 dawned on global investors and a slowdown in
Asia became a possibility, it was only a matter of days for wholesale panic to
overtake the Asian debt markets. Investors holding debt issued by Asian
companies - whether single-sector or conglomerates - sold their exposures, as
they feared a repeat of the events following the Asian financial crisis.
The future of family
This reversal of fortune meant that the doors to financing were abruptly and
alarmingly shut in the face of Asian conglomerates well before any slowdown
became visible in economic numbers. The high yield markets of Asia thus stand
on familiar territory that they barely exited a few years ago: no clarity, no
transactions and no recovery.
If only the Asian high-yield market were held as a benchmark; in other words,
if the economic momentum were to be gauged by credit spreads of these risky
companies, anyone would conclude that the whole region is a complete basket
case. Of course, this is not the situation, but that is only thanks to the
success of larger conglomerates and broad-based professional companies across
the region.
While panic is visible across the board, the most egregious examples involve
family-owned companies, be they resource-based manufacturers from Indonesia,
property development companies in China or technology companies from India.
Investors have taken to fear the ill effects of family control on their debt
recoveries; in most cases the immediate precedents suggest they have a good
reason for fear.
The saga of Satyam continues unabated: the Economic Times in India revealed on
January 22 that the company had inflated its payroll by some 10,000 people in
order to fill up the pockets of senior family members who controlled the
company. This level of fraud, some argue, would be impossible under any other
system: an observation that is partly offset by the fact that the only other
group of Asian organizations that seriously inflate payroll and divert proceeds
in a corrupt fashion are the region's communist governments, including those in
India (but I digress).
Family-controlled companies in China have been behind some of the country's
worst scandals in recent years, ranging from property to milk; however these
must be measured in the context of the growth generated in China over the same
period. In contrast, the country's commercial banks have lost hundreds of
billions of taxpayer money over the same period to corruption and incompetence.
Given all of the above, it is not clear that the "sell-by date" for
family-controlled businesses in Asia has come around. While many
family-controlled conglomerates have fallen by the wayside, at least as far as
their immediate credit spreads are concerned, the ranks of successful companies
also include similar family controlled conglomerates.
Credit remains scarce for more risky borrowers in Asia, thanks to the antics of
the family-controlled companies in Southeast Asia during the last crisis. As
with the counter-intuitive result of that crisis, this scarcity of credit will
also help to accentuate the power and position of relatively liquid and
successful companies across the region; in many cases this will be done by an
expansion of family control to new businesses with potential and a sore need
for financing.
Asian banks, with their ample liquidity and poor credit skills, remain largely
incapable of mustering any courage to make profitable interventions in the
regional high-yield market. The absence of any contiguous Asian debt market
means that most companies will find it well nigh impossible to raise money
independent of their banks; as this involves pledging assets and receivables
among other things, their ability to grow will also be constrained.
The region needs to overhaul its corporate structures if it is to respond
quickly to the current crisis and emerge with a more stable path to growth and
prosperity. As things stand, it appears quite unlikely that any such changes
will be forthcoming; leaving future growth very much in the hands of the same
people who helped the region crash and burn from late 2008 onwards.
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