The Asian Development Bank (ADB) is pushing ahead with an initiative to support bond issues by borrowers with low ratings, which could see the institution providing credit guarantees by next year, a senior official said.
An ADB working group is considering exactly how this guarantee will be offered - by a subsidiary or fund supported by the bank, or perhaps by a new institution set up for this purpose.
"In order to mitigate the credit risk, a guarantee will be provided so that in the event of a default or non-payment of interest, this entity will repay or cover for the investor," Masahiro Kawai, a special adviser to the ADB president, told Reuters.
"If more bonds are issued in the market as a result of this initiative, eventually the liquidity and volume of trading will increase," Manila-based Kawai said by telephone.
Kawai said the ADB was ideally positioned to provide this facility because of its AAA rating and expertise in the area of credit assessment.
The Asian financial crisis of 1997/98 left many companies crippled by dollar debt as the value of local currencies collapsed.
That helped trigger a drive by Asian governments to develop local debt markets and reduce corporate reliance on bank loans to raise funds. Asian bond markets have grown quickly since the crisis but growth has been primarily due to government issues.
The November edition of the ADB's Asia Bond Monitor said corporate bond markets were illiquid, with buy-to-hold investors dominating the underwriting process, meaning bonds were quickly absorbed into portfolios, depriving the secondary market of turnover.
"The guarantee operation will provide more incentive to corporates to issue bonds. That can help expand market size and eventually liquidity in bond markets," Kawai said. He said that although no specific sectors were being targeted, there were a few areas - such as residential mortgages and small and medium-sized enterprises (SMEs) - where such a facility would have an important role to play.
"Bank loans to housing are expanding in Asia and that sector should be encouraged because of the growth in developing countries and an emerging middle class which is pushing demand for housing," he said.
Fast-growing China and India are leading the demand for housing in Asia. China's housing market is flourishing as an estimated 8 million people flock to cities each year and economic growth of 10 percent feeds into family incomes.
India is trying to fill an estimated shortfall of 20 million homes in an economy where growth has averaged nearly eight percent since 2003 and few developers have access to capital markets.
Kawai said SME loans could be collectively securities or a group of companies could, through some mechanism, collectively issue bonds, which could receive credit enhancement or a guarantee from the ADB. While declining to give an estimate of the financial outlay for such an initiative because the plan is still in its preliminary stages, Kawai said he expected the working group to decide on a suitable vehicle by May 2007.