EVERYONE'S heard of the 'great Asian bond market', a market many observers hope will one day rival stock markets or bank loans as a source of financing. In fact, just two years ago, the World Bank said Asia's bond market, at present just the size of Britain's bond market, would swell to about US$1,000 billion by 2004, as expanding corporates and infrastructure needs drove public and private institutions into issuing debt. But how do you judge the bond risk? As banks, governments and corporations look past banks and equity markets to capital markets for funds, and fledgling pension schemes seek out investment outlets, the onus on providing a benchmark for risk is often left to the investor. Banks have a regulatory system of deposit protection, a credit staff that monitors loans and diversified risk. One bad loan is unlikely to sink a bank, and an investor can shop around for money by looking at interest rates. Equity financing is also well regulated in Asia. It's easy to raise funds in the region's liquid stock markets, although many Asian family-owned companies balk at the thought of diluting control. But the bond market, and especially the secondary market, is often poorly regulated in Asia. Many aspects of the debt market are either tightly controlled, as in countries such as China, South Korea and Taiwan, or don't have much of a regulatory framework, as in Hong Kong. Bond investors can check a company's equity or annual reports, and compare yields, but for a guarantee they will get paid back, there's often only ratings agencies they can turn to. 'If the company goes bankrupt, the buyer of the bond takes a 100 per cent loss,' Edward Young, managing director of US ratings agency, Moody's Investor Services, says. 'It's our job to predict the risk of default by these bond issuers.' It's not a role that can be taken lightly. Mr Young reckons about 4000 new bonds and medium-term notes are issued worldwide each year. And the numbers are growing. Last year, Asia issued $82 billion worth of bonds, of which Japan, which has the region's biggest debt market, issued $45 billion. That's drastically higher than the previous year's total of $54.5 billion in bonds from the region. 'The surge was partly because the stock market wasn't doing so well and interest rates were down,' Mr Young says. 'It's also partly because people are more educated about bonds.' There's another reason - the growing tendency of Asians to opt for 'contractual saving schemes' such as mutual funds, insurance and pension schemes, Mr Young said. Long a preferred mode of saving in the West, Asia is beginning to catch on. Hong Kong, for instance, is putting the finishing touches to its Mandatory Provident Fund, while Thailand is drawing up its own pension scheme. Singapore and Malaysia also have state pension funds. And what better place to invest these pools of savings, figures the region's governments, than bonds? Bonds are not only cheaper than bank loans, with lower interest rates, they are also a longer-term alternative. 'With bonds, companies who have 10-year projects have at least 10 years before they have to pay back the money,' Mr Young said. So popular are bonds that traditional borrowers such as governments, banks, corporates, utilities and project finance companies are being joined by structured finance specialists, such as those dealing in credit card receivables. 'But buyers are still predominantly European and American institutions, such as pension funds and banks,' Mr Young says. As more institutions issue bonds to absorb the wave of contractual savings schemes, ratings agencies from the West are flooding in to serve the market. In the past few years, scores of new entrants have deluged the market with opinions on every thing from a company's deposit base, asset quality, debt-to-equity ratios, stability to down-to-earth credit worthiness. Last month, Fitch Investor Services, the ratings agency which invented the AAA rating symbol in 1922, said it had applied to the Hong Kong Monetary Authority for a licence to operate in Hong Kong. It's coming to a market where Moody's, Standard & Poor's, and Britain's IBCA are established and expanding. 'Basically, the more people there are out there giving analysis, the more information investors have, and the more efficient the capital markets are,' Mr Young said. Given the long-term nature of bonds there is more of a risk that a company can go downhill, it is important to choose the services of the right credit rating agency. Last year, according to Moody's, 27 issuers defaulted on $5.4 billion of long-term, publicly-held corporate debt.