Tight credit conditions drive Asia-Pacific corporate insolvencies

Higher interest rates and weaker demand strain corporate balance sheets across the region.

Corporate insolvencies across Asia-Pacific are rising as tighter credit conditions, elevated interest rates and slowing demand converge to pressure companies already weakened by years of economic shocks. The increase comes despite broader global resilience and stands in contrast to Gulf economies, where diversification has lifted non-oil activity to about 70% of GDP.

Across the region, insolvencies climbed 12% and investor sentiment has also deteriorated, with Asian bonds seeing $5.48 billion in outflows in September, the largest monthly withdrawal in more than three years, reflecting concerns over economic slowdown and political instability.

“Several markets are seeing double digit increases, like Singapore, Australia, Hong Kong, South Korea, to name a few. So this isn't random. It's a pattern,” said Bernard Aw, Chief Economist, Asia Pacific at Coface.

Aw said four key forces are driving the trend. “The first one is that interest rates stayed high, so cheap money from the pandemic period is gone,” he said, adding that debt-heavy companies now face much higher refinancing costs. He also pointed to the withdrawal of pandemic-era government support, weaker global demand affecting export-driven economies, and sectoral fragilities in construction, wholesale trade and services. “So don't get me wrong, insolvency isn't disappearing, but the pace is slowing,” Aw said.

From a credit perspective, higher interest rates are tightening financial conditions and raising default risks. “As interest rates go up, the corporates tend to have lower interest coverage ratio, which tends to affect their bank covenants,” said Vikash Halan, Managing Director at Moody’s. “And they hit their covenants, they need waivers, and if they are unable to get waivers, they will have to repay the loan.”

Halan said higher borrowing costs also restrict access to new funding, particularly for companies in expansion mode. “The higher interest rates also affect their ability to borrow more, and their access to funding does get curtailed,” he said, noting that stalled projects can lead to higher leverage and defaults. Elevated rates can also weaken demand, as customers pull back spending, hitting revenues and profitability.

For lenders and investors, both executives highlighted warning signs including stressed cash flows, rising leverage and behavioral changes. “Higher leverage, lower interest, cover, weak liquidity is definitely a sign of stress or potential stress,” Halan said, adding that short-term borrowing, deferred capital spending and deteriorating macro indicators can signal where insolvency risks are building next.