Asian debt, equities may see more pressure: S&P

Asian companies are more likely to default next year as borrowing costs rise, and the region's stocks may fall because they are too expensive, Standard & Poor's said.

Rising costs and tighter access to funding, especially for companies with risk profiles weakened by acquisitions and expansion, will undermine borrowers, the rating assessor said in a report today.

Risk premiums in Asian bonds haven't increased as much as in the US and Europe since record defaults on U.S. loans to people with poor credit histories brought global credit markets to a standstill in July.

"The balance of our rating outlooks on the corporate sector suggests there may be more rating downgrades than upgrades among Asia-Pacific companies in 2008, in sharp contrast to the general improvement in credit quality this year,'' Melbourne-based Ian Thompson, S&P's chief credit officer for Asia-Pacific, said in the report.

Equity markets in the region, having risen 16 per cent this year according to the Morgan Stanley Capital International Asia- Pacific Index, will have less room to keep advancing next year as concerns about inflation and weakening US and European economies intensities, the New York-based rating company said.

The average spread, or extra yield, investors demand to buy Asian corporate bonds instead of US Treasuries has widened by about 1 percentage point from this year's low of 1.21 percentage points in June, according to JPMorgan Chase & Co.'s Asia Credit Index.

Defaults by rated companies are expected to rise next year and could more than quadruple to as many as eight or 10 because there are more high-risk, high-yield borrowers whose ratings are in danger of being downgraded, Thompson said at a conference today. The number of non-investment-grade borrowers rose to 205 this year from 164 in 2006.

"We had a very benign environment because we have such strong fundamentals and very positive economic growth,'' Thompson said. ``But over the past two years, we've seen a lot of expansion activity funded by debt and now debt has become more expensive and that could create some pressure.''

Geneva Finance Ltd., a New Zealand lender, and ASAT Holdings, a Hong Kong-based semiconductor packager, missed debt payments this year, representing less than 0.2 percent of the 1,018 rated companies in the region, and below the global average, according to S&P.

The global default rate for non investment-grade companies held near a record low of 1.02 per cent in August, according to S&P. The rate has remained below its 25-year average of 4.48 per cent for 43 straight months, the company estimates.

"On the whole, while corporate credit ratings should weather global credit market turbulence, casualties are expected, especially outside the financial sector,'' Thompson said.

China's CSI 300 Index, which tracks yuan-denominated A shares listed on the nation's two exchanges, increased 155 per cent this year. China's equity market capitalization more than tripled in 2007 to account for 5.8 per cent of the world total, data compiled by Bloomberg show.

"It will be a more difficult year for stock market returns and we would not rule out the risk of a sharp correction,'' said Singapore-based Lorraine Tan, S&P head of Asia-Pacific equity research.

S&P forecast better-than-average gains next year for China H-shares, Hong Kong, South Korea and Thailand. Japan's stock market will underperform, it said.

The region's equity markets and mergers and acquisitions could also be supported by the weakening dollar, as Asian governments increasingly seek to move out of dollar assets for higher returns, S&P said. Tan predicted the yuan will rise 7 percent next year against the dollar, after adding 5 percent this year.