Rising rates may stoke Asian bond volatility: S&P

Speculative grade bonds or high yield instruments in Asia may show higher tendency for defaults owing to a rise in interest rates over the medium term, according to rating agency Standards & Poors.

The Asian high-yield corporate sector may witness another strong year in 2006, as defaults stay low and economic conditions remain relatively strong.

But there is a risk that credit volatility will gradually emerge over the medium term as interest rates rise and the quality of issuance deteriorates, S&P said.

The share of new issues rated speculative grade as a proportion of total issuance was 47 per cent in 2005, significantly higher than the 28 per cent recorded in 2002.

High-yield issuance has exploded in recent years, the agency said. In 2005, the agency rated about $ 7 billion of new high-yield corporate bonds in Asia ex-Japan, compared with $ 5 billion in 2004.

The combination of excess liquidity and a growing appetite for credit risk allowed many high-yield issuers to raise long-term funding in 2005.

This is expected to continue in 2006, with growth in high-yield bond issuance expected to again outpace that in the investment-grade sector, the rating agency said in its report titled "Asia High Yield: Watch Out For Potholes".

However, default studies show that a rising proportion of lower rated issuers usually serve as an early warning of renewed default pressure.

These high-yield bonds are a lot more susceptible to market volatility and have a greater chance of experiencing financial distress.

Besides interest rate trends, a significant slowdown in consumption in the US, higher oil prices also pose major risk for Asian high yield bond market.

Another trigger could be a sharp increase in corporate risk tolerance, such as acquisitions or more aggressive growth strategies, which could weaken debt protection measures.

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India not in top 10 FDI hotspots

India does not figure in the list of the 10 largest foreign direct investment (FDI) beneficiaries in 2005 unlike as in 2004, according to a report published by global ratings major, Standard and Poors'.

The country witnessed a 13.2 per cent increase in FDI inflows in 2005 to $6 billion as against a rise of 15.2 per cent ($5.3 billion) in 2004.

Nevertheless, India was the highest among the five largest Asian FDI recipients in 2005. In 2004, India received $5.3 billion as FDI, which accounted for 4.2 per cent of its gross domestic product and 15.8 per cent of the total investment.

Other economies which reflected considerable increase in FDI inflows included the Czech Republic (rated 'A- by Standard and Poors') and the Republic of Turkey (rated as 'BB-').

The report stated that the year 2005 has seen the rate of growth of FDI inflows to emerging economies slowing down.

Asia continues to receive the highest FDI inflows (in nominal terms) at $161.5 billion, or 44.7 per cent of total FDI inflows in 2005.

Among these, China (rated 'A-' by S&P) received over $60 billion in FDI in 2005 and continues to be the most preferred FDI location among emerging market economies.

However S&P feels that after years of spiralling growth rates in inward investment, the pace of FDI growth in China may undergo a slowdown.

Recent data from the United Nations Conference on Trade and Development indicates that FDI inflows increased by 29 per cent in 2005, to $896.7 billion from $695 billion in 2004.