The spectacular collapse of United States energy giant Enron Corp has been a wake-up call for Asian bond investors. Hard questions have been asked about Asian corporate accounting once again but so far no nasty surprises have been unearthed to tarnish an extended love affair with regional debt. Merrill Lynch's index of Asian investment grade debt is up 1.78 per cent year to date, building on gains of 11.9 per cent last year. 'When something like this happens we all have to go back and review the numbers but we are comfortable with them and the market is comfortable with where these credits are trading,' Merrill Lynch's fixed-income research manager Jason Carley said. Some US corporate bonds took a severe buffeting as investors conducted a witch hunt for lookalikes of Enron, which duped investors about the amount of profits and debt it had through questionable accounting tactics. If investors find they are working off numbers which have a rose-coloured tint to them, bonds can be sold as quickly as stocks when higher credit risks are factored in. In contrast to the wild swings in the US, the spread on Hutchison Whampoa's bonds above US treasuries only moved five or 10 basis points before snapping back last month when reports questioned some of its off balance sheet contingent liabilities, Mr Carley said. 'In a credit sense a lot of these things have been looked at before. Post-crisis, people have become much more cautious in analysing Asian debt,' he said. The bond market in Asia was now a different place to its pre-1997 days when 'anybody with a business plan could raise US$200 million', Mr Carley said. The $12 billion default by Asia Pulp & Paper in March 2000 is still fresh in many minds. However, with the yield on 10-year US treasuries about 5 per cent, quality Asian bonds are likely to remain on global investors' shopping lists in the hunt for higher returns. Demand from Asian banks remains strong with bond returns helping rebuild balance sheets amid slack demand for loans. Nevertheless concerns about financial disclosure will not be going away soon for either Asian bond issuers or investors, particularly with an expected rise in regional corporates coming to market. 'US investors are going to be highly sensitive to these issues,' Mr Carley said. The Enron case highlighted three key accounting concerns in the US: potential fraud, how revenue is recognised, and the concealment of liabilities. 'Focus in public discussion in Asia has been on the third,' Mr Carley said. In particular, it is how to deal with the risk posed by the debts of subsidiaries which are reported but not consolidated into parent balance sheets. The key was to take an analytical rather than accounting approach and work out whether a parent would step in if a subsidiary was in trouble. For example, ratings agencies put Singapore Power International on a par with parent Singapore Power on the assumption that the subsidiary would always be supported. Sometimes debt labelled 'non-recourse' in a financially stretched subsidiary would be paid off by a parent if core interests were at stake, Mr Carley said. 'However, there have been instances where even debt in strategic assets has not been supported - in particular where it threatened the well-being of the parent. Air New Zealand allowing Ansett to collapse is an example of that,' he said. Some of the credit worries will be eased if the US stays on its recovery path. Interest rates may rise, hurting bonds, but a better economic picture would also reduce risk premiums in Asia and help spreads to tighten. If Asia could continue to dodge Enronitis, high grade bonds could bring a return of about 8 per cent this year.
