For chief financial officers in Asia the party is over - a pity since many failed to turn up when the joint was really rocking with record low loan rates and spreads on local bond issues. True, 2005 turned out to be a stellar year in certain selective markets - Asian bond issues in G3 currencies, for example - which surpassed pre-Asian crisis levels. But across the board, the steady process of de-leveraging balance sheets - triggered initially by that crisis and sustained thereafter by patchy economic growth - was meantime continuing. And according to analysts at Deutsche Bank, Asian corporate gearing ratios will retreat even further this year. Even in those economies where investment growth is accelerating, the analysts advised bank investors in their latest strategy note that trends from listed Asian companies suggest an ongoing de-leveraging from peak levels in 2001, when debt accounted for almost 40 per cent of net assets, to about 20 per cent by the end of this year. 'For new investment and working capital, corporates are increasingly reliant on equity funding and at the same time increasing their debt repayments. This does not bode well for corporate loan growth,' they added. Neither, of course, does it bode well for bank interest incomes and limited credit growth is one of the reasons the Deutsche analysts conclude: 'It is not shaping up to be crash hot year for the regional [financial] sector.' The assessment squares with the outlook from some more sober-minded analysts for bond issuance in the new year which is likely to be shaped, according to Calyon Capital Markets Research, by factors that will include an end to the desperate search by fund managers for high-yield Asian issues as their own domestic rates rise; the 'overdone' squeeze on spreads that has left little relative value in Asia compared with the rest of the world and the prospect of defaults now beginning to rise from their lows. The upshot from an issuer perspective is that 'the best is over' for Asian credit spreads, says Calyon, and forecasts average high-grade spreads to widen by 10-20 basis points and high-yield spreads to widen by between 25 and 35 basis points this year. On the subject of defaults, ratings' agency Moody's Investors Service concurs with Calyon. The number of issuers defaulting on Moody's corporate-rated bonds might have fallen for the fourth consecutive year last year, it reported last week, but the total dollar volume of defaults rose sharply - to US$28 billion from US$16 billion in 2004. As for this year, it added that its default rate forecasting model for its issuer-weighted global speculative grade default rate predicted that the default rate would rise from 1.8 per cent now to 3.3 per cent by the year end. Apart from slowing US economic growth, another cloud overhanging capital markets, Moody's pointed out, was the flattening of the yield curve - historically correlated with slowing economic growth and a by-product of that outcome, namely, rising default rates. Of course investment bankers are currently shrugging aside any suggestion that bond issuance might be in for a correction. They wouldn't be investment bankers if they admitted such a prospect was on the cards. And neither, it is true, will any dramatic change be recorded for Asian debt markets when the final sums are tallied at the end of the year. But if heady forecasts of another record year were based on prospective issues that had relied for their arithmetic on spreads achieved by Asian borrowers last year, there may well be some rude surprises in store for issuers and investors. To be certain there is still a lot of money in search of a home and on the margins there will always be demand for 'high-yield' Asian bonds - although the concept has begun looking a little jaded. But in an environment of rising corporate defaults, only the boldest of money managers is likely to continue the chase for an increasingly unattractive yield up the risk curve. Meanwhile, mainstream money managers, including bank treasurers, are more likely to be taking advice from people like Calyon, who suggested this week: 'As a natural corollary of this risk-reward balance, the main theme of our recommendation in this environment is to reduce the risk appetite and focus on solid credit quality.'