Alarm sounds for default rate of Asian bonds
text size

Alarm sounds for default rate of Asian bonds

Bond default rates are increasing worldwide, but especially in Asia-Pacific because of the impact of the real estate crisis in China.

The defaults are for bonds across all classes of credit ratings, with the average time to default for Asia-Pacific bonds taking place more than twice as quickly as bonds at the global level.

According to a joint study conducted by the Federation of Thai Capital Market Organizations (Fetco) and the Capital Market Development Fund (CMDF), debenture default rates are increasing globally, signalling a potential crisis.

The real estate crisis in China has affected debt instruments across the region. The average time to default has rapidly accelerated.

The defaults are occurring even though bonds in Asia have a better credit rating than those issued in other regions.

"Investors are concerned as bond default rates are rising around the world," noted the study published by Fetco and the CMDF.

"Many companies both in Thailand and abroad have begun to experience more problems this year because of the global economic slowdown that has lasted for many years, aggravated by the pandemic that started in 2020. The US's monetary policy of raising interest rates to curb inflation was another factor causing businesses to suffer.

"The continued uptick in interest rates had a significant impact on the bond market, causing default rates to rise."

In 2022, the default rate of speculative-grade bonds worldwide rose to 1.9% from 1.7% a year earlier, while the default rate in Asia-Pacific doubled from 3.2% in 2021 to 6.4% in 2022.

There were only 131 corporate defaults in Asia-Pacific between 1993 and 2022.

The value of global corporate defaults exceeded US$107 billion last year, of which more than $1.5 billion took place in Asia-Pacific.

The region posted the highest rate of defaults since 1997.

Among bonds issued in Asia-Pacific, which includes Australia, New Zealand and several emerging markets, the highest proportion were rated BBB investment-grade bonds.

Elsewhere in the world, the highest proportion of bonds issued were lower grade bonds, the majority rated B or speculative-grade bonds, the research noted.

Bonds issued in Asia-Pacific have an average time to default of 3.5 years, much faster than the global average of 6.2 years, according to the study.

At the end of August, data from the Securities and Exchange Commission indicated the value of Thai investment-grade bonds is 27 trillion baht, accounting for 93% of all debt securities.

Analysis carried out by the Thai Bond Market Association found bonds with various ratings all face a probability of default to some degree.

Bonds with a rating of higher than BBB are considered to be investment-grade, while those rated below BBB are considered speculative-grade bonds.

Bonds rated between B- and CCC+ have a 20% chance of default on average, while bonds rated CCC+ to C have a 20% to 100% chance of default, based on the analysis.

"In every economic crisis, the number of corporate bond defaults increases significantly," the research noted.

Do you like the content of this article?