Credit Shift: As Global Corporate Borrowers Seek $60 Trillion, Asia-Pacific Debt Will Overtake U.S. And Europe Combined Primary Credit Analyst: Jayan U Dhru, New York (1) 212-438-7276; [email protected]Secondary Contacts: Terry E Chan, CFA, Melbourne (61) 3-9631-2174; [email protected]Luis Manuel M Martinez, Mexico City (52) 55-5081-4462; [email protected]David C Tesher, New York (1) 212-438-2618; [email protected]Paul Watters, CFA, London (44) 20-7176-3542; [email protected]Table Of Contents Asia Grows Fast, The U.S. Picks Up The Pace, And Europe Stays Slow Higher Risk For China's Borrowers Means Higher Risk For The World Increased Disintermediation Is Occurring Almost Everywhere The Energy Sector Grows Fastest, Followed By Asian Real Estate And Health Care A Confluence Of Risk? Notes Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 15, 2014 1 1333627 | 300000480
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Credit Shift: As Global CorporateBorrowers Seek $60 Trillion,Asia-Pacific Debt Will Overtake U.S.And Europe Combined
§Assumes debt grows at the same rate as GDP over the next five years. †Assumes debt grows at 1.2x the rate of GDP over the next five years.
N/A--Not applicable.
Table 2B
Outstanding Debt, Actual 2013 And Projected 2018
--Total debt (bil. US$)--
Actual outstanding 2013 --New demand 2014-2018-- --Projected outstanding 2018--
1x§ 1.2x† 1x§ 1.2x†
Asia-Pacific 24,200 10,456 13,222 34,658 37,424
Australia 1,099 148 215 1,247 1,314
China 14,211 7,655 9,712 21,865 23,923
Hong Kong 571 257 318 828 890
India 950 435 592 1,386 1,542
Indonesia 201 67 96 267 296
Japan 5,053 936 1,128 5,990 6,181
Korea 1,380 669 799 2,049 2,179
Malaysia 294 167 204 462 499
Singapore 233 71 89 303 322
Thailand 208 53 70 261 279
North America 14,144 3,611 4,431 17,753 18,573
U.S. 13,104 3,424 4,187 16,527 17,290
Canada 1,040 187 243 1,226 1,283
Europe (Eurozone and U.K.) 11,235 3,204 3,657 14,437 14,891
Eurozone 9,555 2,531 2,881 12,086 12,436
U.K. 1,680 672 776 2,351 2,455
Latin America 1,140 319 435 1,458 1,574
Brazil 867 224 314 1,091 1,180
Mexico 273 95 121 367 394
Total 50,719 17,590 21,745 68,307 72,463
§Assumes debt grows at the same rate as GDP over the next five years. †Assumes debt grows at 1.2x the rate of GDP over the next five years.
N/A--Not applicable.
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The Energy Sector Grows Fastest, Followed By Asian Real Estate And HealthCare
To examine which broad industry sectors in each region raised debt faster than others, we reviewed financial data of
more than 8,500 listed companies (source: S&P Capital IQ). Over the five years to 2013, corporate debt grew fastest in
the energy sector, particularly in the Asia-Pacific region (owing to China's energy appetite), where debt grew 121%, but
also in North America (73%) and Europe (59%). The 84% growth in corporate debt in the Asia-Pacific real estate sector
is a bit worrisome (see chart 5). The health care sector has also shown growth. North America leads the charge with
78% growth, followed by Asia-Pacific at 51% and Europe at 27%. Debt in the materials and mining industry has grown
significantly in both Asia-Pacific and North America, by 51% and 43%, respectively. In addition, the North American
information technology sector stands out, with corporate debt growth of 57%.
Chart 5
Meanwhile, industry sector debt in Latin America has tended to grow by triple digits (see chart 6), following
deregulation initiatives in the oil and gas sector, sustained infrastructure development in energy and transportation,
and high M&A activity. Nonetheless, this represents a small sample size of 199 companies. In Latin America, the
industrials, health care, information technology, and telecommunications sectors show the highest growth rates.
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Chart 6
In our view, the structural conditions that have required rapid growth in external funding in the energy, health care,
and (in the Americas) information technology sectors in recent years are likely to persist. Specifically, the rise in debt
in the energy sector is a result of the voracious appetite for energy from emerging economies such as China, along
with a desire for energy independence and concern for the environment from the U.S. and other major powers around
the globe. Energy investments will come from the continued push for increases in oil production (and from oil
refineries in particular, excluding Europe) and the impetus toward renewable energy in Europe. Moreover, horizontal
drilling and hydraulic fracturing have tapped into vast reserves of natural gas and oil that had been too costly to
recover. In the U.S., shale gas and oil production has rocketed over the past five years, increasing at least 50% every
year. By the end of the decade, shale oil and gas production could make the U.S. energy independent and create
roughly two million jobs. More broadly, the International Energy Agency estimates that almost $200 billion has been
invested annually in recent years in energy supply in the U.S. and that it could increase by almost 50% in coming
years.
The megatrend of global aging has spurred growth in the health care sector. The first of the baby boom generation
reached 65 in 2011. In the U.S., this generation includes about 78 million people, a demographic that has altered the
contours of U.S. political, social, and economic life from the 1950s to now. But given the sheer size of this group and
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the likelihood that baby boomers will have longer lives than those of previous generations, the market for health care
will continue to increase. In turn, according to the Centers for Medicare & Medicaid Services, Medicare enrollment will
increase over 25% by 2022.
Information technology is helping to transform not just health care but every aspect of society. The dramatic declines
in the cost of memory and microprocessors have created a world of seamless connectivity. This has led to a
proliferation of new business models, such as personalized marketing and social networking. Furthermore, the storing
of everyday transactions has created the world of big data, where large databases help companies better understand
consumer preferences, exploit new market activities, or even search for threats to national security. In response,
privacy and security concerns have prompted telecommunications firms to ensure that their fixed and mobile
broadband networks are both fast and secure. Gartner Inc. (an American information technology research and
advisory firm) estimates worldwide IT spending to reach $3.8 trillion in 2014, an increase of over 3% versus 2013.
A Confluence Of Risk?
With borrowers in Asia-Pacific taking a greater share of global corporate funding needs, some industry sectors growing
much faster than others, and increased bank disintermediation, Standard & Poor's is keeping an close eye on the
concurrent increase in credit risk. As the global recovery broadens, and monetary policy starts to normalize, growing
demand for financing among nonfinancial corporate entities could encounter tighter credit conditions as funding costs
rise and the lending capacity of the banks starts to bite. Our base case is for funding costs to increase incrementally. In
the unlikely event of interest rates rising sharply, the more highly leveraged corporate borrowers, being cost-sensitive,
are most vulnerable.
In the eurozone, where banks appear to have the most limited capacity to increase lending, we see the greatest
potential for further disintermediation, even with growth running at relatively low levels. Banks around the world are
shoring up their balance sheets and, in light of increased regulation and higher cost of capital, are being more selective
regarding the use of their respective balance sheet. More selective lending could squeeze some borrowers, especially
those at the lower end of the ratings spectrum. To avoid a confluence of risk in investment portfolios, investors should
be attentive to the credit shifts in the global corporate landscape by geography, sector, and debt type.
Notes
(1)This estimate is double that calculated by the Financial Stability Board (FSB) as the FSB figure includes only other
financial intermediaries being investment funds, broker-dealers, structured finance vehicles, finance companies and
money market funds, and hedge funds. The FSB figure does not include intercorporate lending.
Related Criteria And Research
Related Criteria
• Corporate Methodology, published Nov. 19, 2013
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Related Research
• For Banks Globally, Higher Capital Requirements And Moderate Returns On Equity Will Constrain Lending Growth,
June 11, 2014
• Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity, June 11, 2014
• Credit FAQ: Chinese Steelmaker's Default Highlights Troubles In Sector, Could Benefit Larger Players, March 31,
2014
• Chaori's Default Highlights The Need For Institutional Framework Improvements In China's Debt Capital Market,
March 25, 2014
• China Property Watch: Sales And Prices Are Likely To Moderate This Year With Tighter Financing, March 4, 2014
• Credit FAQ: Can China Come To Grips With Soaring Public Debts And Moral Hazard In The Financial System?,
March 3, 2014
• More Distressed Trust Products Are Likely To Emerge In China This Year, Says S&P, Jan. 29, 2014
• China Credit Spotlight: High Leverage And Slowing Growth Increase Top Corporates' Credit Risks, Aug. 18, 2013
• The Credit Cloud: China Will Leapfrog The U.S. In The Race For $53 Trillion In Corporate Funding, May 14, 2013
• China Credit Spotlight: Significant Financial Risks Fan The Flames For China's Top Corporates, Sept. 10, 2012
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