KUALA LUMPUR (June 21): Asia-Pacific issuers are battling inflation and rising borrowing costs.

In a statement on Tuesday (June 21), S&P Global Ratings said this comes amid a backdrop of record-high debt and curtailed financing.

The rating agency projected scenarios in which 16% to 25% of rated entities could face downside risk to their credit quality amid mounting inflation and rising funding costs.

In a commentary titled "APAC Corporates: Inflation, Rate Strains Set In”, the agency outlined a high-level analysis of the sectors, geographies and rating levels in which issuers are the most exposed to rating downside.

S&P credit analyst Xavier Jean said broad-based raw material inflation and rising funding costs are two of the biggest challenges to corporate credit quality in Asia-Pacific for the next six months.

S&P said Asian companies are no stranger to exogenous shocks such as volatile raw material costs, fluctuating funding costs, and fast-changing investor sentiment.

But these factors are now coinciding with more leveraged balance sheets across the region and a pick-up in capital spending in 2021 amid recovering profits, it said.

S&P said given shrinking rating headroom, issuer-specific characteristics are likely to shape corporate credit profiles more than broader macro or sector dynamics.

Meanwhile, S&P credit analyst Abhishek Dangra said issuer-specific initiatives to offset external strains and restore financial headroom, be it with price increases, moderate spending or debt repayments, will be critical to avoid a wide-ranging round of rating downgrades over the next 12 months.