Companies in Asia Pacific (APAC) have a wide range of considerations when seeking capital financing
When planning to raise capital there is an array of factors APAC treasurers and CFOs must examine. These include industry- and country-specific matters, among many other variables. An added challenge is today’s prolonged market volatility, which may continue for several years to come.
A discussion at the APAC Treasurers Forum highlighted the variables treasurers must consider when devising a robust corporate financing strategy. Key takeaways include:
A long-term view is favored over short- and medium-term approaches
A long-term view is preferred, as markets continue to be unpredictable. For instance, stock market volatility is currently at its mildest for more than a decade, yet other risks are causing volatility. Among others, these include terrorism, uncertainty surrounding the US elections and Brexit, low commodity prices, and political tension between nations that circle the South China Seas. Companies must price volatility into their cost of capital and are advised to issue longer term debt to deleverage when required.
Strategies vary considerably from industry to industry
Energy and raw materials companies, for instance, are undergoing a prolonged period of stress due to historically low commodity prices. This is impacting the credit rating of these businesses, and hence their ability to raise capital and manage their capital structures. Conversely, the healthcare and technology sectors are performing positively, which is allowing companies in these industries to raise capital more easily and manage their capital structures more effectively. However, these relatively “lean sectors”: even with comparatively healthy balance sheets could find credit hard to come by should key sectors of the economy become credit constrained.
Regulatory environments and appetite for debt differ between countries
Geographical factors play a critical role in influencing capital structures. Local regulations that govern how capital is raised, as well as the ability to move cash from one jurisdiction to another, are important considerations for treasurers. In addition, interest rates and the sophistication of a country’s capital markets also influence a company’s capital structure. In the US, for instance, corporations seldom finance projects through loans, due to bonds having longer tenors. Chinese businesses generally favor short tenor bank loans because the nation’s capital markets are less sophisticated in terms of investor base and range of available instruments to issuers. This is an opportunity for Asian firms to adopt strategies that are working well in the West. These include increasing public or private equity; and extending maturities through the debt capital markets.
Diversity of operations is attractive to investors
New business models are highly appreciated by investors, as they present a ‘one-stop-shop’ for diversification. Businesses with interests in a wide variety of industries can manage their capital structures centrally ― as per a conglomerate ― or employ a federation structure, where group companies manage opportunities and risks independently. Both approaches have a proven track record in APAC, and are subject to a business’s unique needs.
Raising debt in US dollars is appealing to companies in emerging markets, despite currency risk
Raising capital in one currency and operating in another is attractive to businesses in emerging market economies, like those in Southeast Asia. However, this needs to be managed with caution due to cross-currency risk. Nonetheless, it is attractive to raise in US dollars if a significant amount of a firm’s revenues is in this currency. Furthermore, capital markets in emerging economies are becoming increasingly sophisticated with regards to instruments and the number of market players. This will continue to facilitate capital raising in local currencies and US dollars, and ensure that the cost of capital is competitive.
To learn more, please contact your J.P. Morgan representative