At $60 Trillion Asia corporate debt will exceed U.S., Europe combined: Standard & Poor’s

MELBOURNE, Australia, June 16, 2014 – Global corporate issuers will seek an estimated $60 trillion in new debt and refinancing through 2018, with the majority of that growth and its attendant risks concentrated in the Asia-Pacific region, according to a report published today by Standard & Poor’s Ratings Services.

The report, titled “Credit Shift: As Global Corporate Borrowers Seek $60 Trillion, Asia-Pacific Debt Will Overtake U.S. And Europe Combined,” suggests some future financial stress could stem from Asia., as China and its neighbors widen their lead over the U.S. and Europe as the largest group of corporate borrowers in the world.

In a related report, titled ‘Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks’ Capacity’, Standard & Poor’s Ratings Services projects that disintermediation, or the increased reliance on debt securities instead of bank loans for financing, will grow 3.5%, or nearly $3.1 trillion, by 2018.

“The emergence of China as the biggest group of corporate borrowers, moderately increasing bank disintermediation, and faster debt growth in sectors related to the growing global middle class are likely to drive global corporate debt issuance over the next four years,” said Jayan Dhru, Global Head of Corporate Ratings at Standard & Poor’s Ratings Services.

“The U.S. continues on the path to economic recovery while the Eurozone struggles with marginal growth, but the bottom line is that this is a China story. Higher risk for China’s borrowers means higher risk for the world.”

Specifically, we compared China’s corporate borrowers to their global peers among more than 8,500 listed global companies (data source: S&P Capital IQ). We found that while China’s corporate companies started 2009 better off than global peers, their cash flow and leverage have worsened in subsequent years.

From a funding perspective, fast-growing economies such as China and Brazil, which still rely heavily on their banking systems for funding, may experience more rapid disintermediation than mature financial markets unless they receive fresh capital injections into their banking systems.

Although we expect a moderate increase in disintermediation in Europe amid sluggish corporate loan demand, we expect wide variations within the continent. The U.K. could experience a steady increase in disintermediation because of banks’ reduced lending capacity and an increase in corporate financing needs.

Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.