The turmoil in the global economy has serious implications for growth corporations in the emerging markets. Rather than assessing corporate capital raising exercises from within the rational prism of the credibility (or otherwise) of business models, the markets are simply assigning sharply widened, and unreasonable, risk spreads on an across-the-board basis.
The challenge for strategically placed companies is obvious. Managements requiring equity or debt capital need to prove that the quality of underlying assets (hard assets or receivables) overrides negatives attributed to country rating downgrades, currency forecasts, domestic interest rate fluctuations and sharp falls in stock markets.
This process of highlighting (and capturing) the current and future behaviour of assets supporting business models can only achieve success via asset securitizations. Given that a huge number of professional and retail investors have exited traditional investments in recent weeks, there is a record amount of money sitting on the sidelines, globally. Attracting that money demands a combination of (1) a fair reflection of asset values and (2) an acceptance of the revised pricing environment.
In terms of equity, this means higher dilution, and equity may be the only route open for venture-type companies with no assets in place at this juncture. In terms of debt, this implies relatively higher interest rates; for example, a departure from the Libor+150 basis points to Libor+300 basis points, or a fixed dollar-denominated 5-year loan at 10% rather than 7.5%.
It is critical to recognize that spreads (on the benchmark US Treasury rates of Libor) for corporations located in the emerging markets are being influenced by prices in the credit default swap market, by foreign exchange rate forecasts and by the perspective that the global recession will have far-reaching implications for the developing world. These rather generalized perceptions fail to apply selectivity, and it is this failure to apply selective criterion which now challenges growth company managements. While there is no doubt that fundamental valuations need to be revised in many instance, these valuations should, in technical terms, only impact upon spreads and yields.
According to recent feedbacks from significant private equity pools in Asia and the Middle East, the acceptable yield must follow close asset scrutiny, and the determination of the debt service capability of the asset itself. But there is no doubt that dynamic business models will be funded, as long as debt buyers do not have to concern themselves with the actions of governments, central banks and other policy makers.
Furthermore, debt buyers now desire that their risk-reward profiles are determined exclusively by the assets incorporated in the business models, not by the corporations controlling the assets prior to securitization. On this note, it is important to recognize that international investors have no appetite to chase down managements with respect to their expansion plans and their discretion to adjust business models at any time, both of which have the real potential to dilute the asset offered as security.