Asian balance sheets remain healthy and economic growth resilient despite the global credit crunch, but, by one market measure, Asian bond issuers are an even worse risk than during the financial crisis a decade ago.
The credit problems that originated in the US housing sector have led to much smaller asset writedowns in Asia than in Europe and the United States, yet the cost of insuring against Asian debt defaults, as measured by credit default swaps (CDS), has soared to record highs.
"Asian borrowers are asking: 'What's subprime? Why do I care? What's going on in New Jersey shouldn't impact the strength of my balance sheet'," said Fergus Edwards, director of Asia syndicate at UBS.
One big problem, analysts say, is the relative lack of liquidity in Asian debt compared to more developed markets in Europe and the United States, although hard data in the opaque, over-the-counter CDS market is hard to find.
According to one CDS trader, global investors, offered a choice between similarly rated issues, will more often than not plump for US or European bonds over Asian debt because they are easier to sell quickly if the need arises. "Fundamentals-wise, Asia is definitely stronger than the US or Europe," said the trader, who is not authorised to speak to the media.
"But people still prefer to be in European or US names because they are much bigger. Market liquidity is bigger and volumes are larger."
That helps explain why CDS levels in Asia are well above the levels seen elsewhere in the world and above those ruling at the time of the Asian financial crisis, making it prohibitively costly for Asian issuers to raise money from overseas borrowers. Any recovery in the region's credit markets depends on an easing in a global liquidity crunch in which Asia has played little part, compounding the frustration felt by market players.
Asian bankers said clients were complaining about having to pay for US problems.
"Asia is still strong. Credits are improving, economies are improving, balance sheets are improving, therefore borrowing costs should be improving," said the head of Asian debt capital markets for a major US investment bank.
The iTraxx Asia ex-Japan high-yield index, which tracks the cost of insuring against the default of 20 non-investment-grade names including South Korea's Hynix Semiconductor Inc and Philippine sovereign bonds, hit a record at around 660 basis points last week.
That means insuring $10 million of the underlying debt over five years would cost an investor about $660,000, more than triple the $210,000 paid in mid-October, when bond spreads started to shoot up under the impact of the crisis.
In comparison, the iTraxx Crossover index, which measures 50 similar "junk"-rated credits in Europe, hit about 580 basis points last week. Put another way, the iTraxx index for Asia is implying a five-year default probability of at least 30 percent, according to some calculations, or that more than six names will default during that period. Many see no sense in that.
According to Standard & Poor's Ratings Services, out of 12 defaults seen so far this year, none has come from Asia.
Furthermore, Asia has seen only one rated issuer default in each of the previous three years, and out of the 114 rated issuers the agency sees at risk of defaulting, only three are Asian - G Steel and paper producer Advance Agro from Thailand, plus Nasdaq-listed semiconductor firm ASAT Holdings Ltd from Hong Kong.
"It's a very difficult time for investors. The problem is that we are not trading at individual credit fundamentals. It's frustrating," said Clifford Lau, a fund manager at Pramerica Investment Management in Singapore.
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