Singapore-listed oil fields company Swiber Holdings yesterday defaulted on a 450 million yuan (US$67.4m) bond, casting a shadow over the company’s ability to service the US$259 million of debt it has outstanding from issuance in a variety of formats off its MTN programme. This includes paper issued in Singapore dollars, renminbi and US dollars (in the latter case a US$150m sukuk on which it missed a coupon payment last month).

The question which this default begs is whether Swiber’s problems should simply be seen as a granular item of idiosyncratic risk involving a collapsed oil price and a legacy of high leverage incurred during the boom times for the oil industry during the last decade or something more sinister. 

That question might be asked in relation to the US$60 billion-equivalent of debt which is outstanding in the listed corporate complex in Singapore, where debt service strains are likely to emerge in the face of a contracting economy; Singapore’s GDP contracted by 0.7% in the last quarter and the macroeconomic outlook remains profoundly uncertain. Indeed, when Swiber shocked the market with its default, the resonance was immediate in relation to indebted companies exposed to what could conceivably be a brutal downturn in the business cycle.

But one can expand that thesis to the entire high-yield Asian debt complex. The most obvious place to start is the China offshore property sector, where debt service ratios are provoking anxiety. 

From a healthy average four times Ebitda to interest coverage ratio just a few years ago, the number has collapsed to under two times, and given sluggish property sales in China and onshore debt issuance restrictions, a dangerous one time coverage ratio beckons for many of the larger developers with portfolios of offshore debt.

Despite relatively high levels of GDP growth in Asia, the underlying picture is one of excessive leverage both at the corporate and household level, and the years of credit growth appear to be giving way to strain which is likely to rise should the economic contraction witnessed in Singapore – one of the most exposed in Asia to the global economy – be replicated across the region.

To return to China: the country’s debt-to-GDP ratio has steadily ramped up since the global financial crisis, increasing by 85% to a whopping 232% of GDP since 2008. A large proportion of the leverage and concomitant bad debts is held at the state-owned enterprises, local government and the large banks; but SMEs and smaller banks are also sitting on non-performing loans, and the trend is negative.

The worry in the region is that Federal Reserve tightening will pressure regional currencies, usher in a period of monetary tightening in an attempt to ameliorate those slumping currencies and in the process bring sharply declining growth or even recession.

Should regional currencies continue to decline in lock-step – as they have in recent days in fear of the FOMC announcing a US rate increase – the pressure on debt service at regional entities with offshore debt exposure will be ramped up. 

Negative interest rates and the ongoing global quest for yield might provide some comfort that the extraordinary bull market in regional bond markets which increasingly resembles a bubble remains intact. But recent sell-offs in US Treasuries, Japanese government bonds and German bunds suggest that the ultra-low interest rate scenario may be waning. If that is the case, Swiber’s default must not be put in the idiosyncratic basket but might well herald the shape of things to come in Asia’s debt markets.