With investor interest in Southeast Asian debt at its nadir, analysts are expecting companies in those countries to start tapping the "future- flow securities" market to raise cash.
Future flows are securities backed by assets that do not exist or have not yet been sold when the securities are issued. For example, a steel company could sell bonds backed by sales of steel that have not yet been completed. Or a foreign bank might issue securities backed by anticipated credit card receipts from American tourists.
These securities emerged this decade as a way for Latin American companies to circumvent the sub-investment grade ratings of their home countries.
Asian companies largely ignored the market because corporate and sovereign ratings were until recently well above investment grade. Those high ratings meant companies could issue inexpensive straight corporate debt to finance their businesses.
But with the sovereign ratings of South Korea hovering just above junk- bond status, and with Korea Development Bank unable to sell its $2 billion debt offering last week, American bankers say Asian companies will have to start thinking about issuing future-flow securities if they want to raise capital. (On Friday, Moody's Investors Service downgraded Korea Development Bank's commercial paper program to "not prime.")
"Historically, these deals have made little sense in Southeast Asia," said Jorge Calderon, managing director at Credit Suisse First Boston. "But they may make a little more sense now."
Richard Hunter, an analyst with Fitch/IBCA in London, said midsize companies will be particularly attracted to the securities.
"Large corporations there are having trouble raising money, so I can imagine it will be especially difficult for medium-size companies," he said.
About $5 billion of future-flow securities were issued in 1996. But analysts say that number has dropped dramatically in 1997, because foreign companies have been able to sell straight corporate debt to investors.
Investors frustrated by the low yields in these bonds are eager for the chance to buy into more high-yielding instruments. But it is unlikely that Korean companies will be thrilled to issue the securities.
The offerings, which investors demand be in U.S. dollars, are expensive to execute-a $500 million future-flow deal will usually have higher interest rates and as many if not more underwriting fees as a $1 billion straight corporate debt deal. Covenants are also often more restrictive than for regular bonds, and investors have no way to get paid if the issuing companies go bankrupt.
Even if the credit ratings of Southeastern Asian countries hold steady now, so much damage might already have been done that U.S. investors may start demanding the same kind of protection from Korean corporate and bank bonds, said Alexander Batchvarov, analyst at Moody's Investors Service.