Jump in Aussie borrowing costs

Sydney

AUSTRALIAN companies are coming to terms with higher borrowing costs, as the country faces its first recession in almost three decades amid the coronavirus pandemic.

The average three-year loan margins have jumped to levels not seen for six years in 2020, according to Refinitiv LPC data.

Investment-grade borrowers are paying an average of 143bp, up from 85bp in 2019, and speculative or unrated issuers 348bp, compared to 217bp last year.

A glut of financings from hard-hit sectors such as travel and energy have pushed average margins higher, but less-affected borrowers have also had to pay up as banks grow more risk averse.

"The cost of capital for the banks is more expensive, and that is going to be passed through to borrowers through increased margins," said Gavin Chappell, head of syndications for Australia at ANZ.

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"Should we have a broader global economic fallout and many more borrowers facing downgrades and defaults over the next six to 12 months, that will place a significant burden on banks' capital positions. This capital issue could have an impact on the banks' capital base and as such a bank's ability to lend, thereby impacting overall market liquidity."

Blue-chip companies such as energy retailer Origin Energy, construction and property group Lendlease Group and flag carrier Qantas Airways are among those paying to borrow from banks as their businesses have succumbed to virus-induced lockdowns and a plunge in oil and gas prices.

Moreover, unrated or non-investment grade companies from sectors that are seemingly resilient to the pandemic such as telecoms, data centres and critical infrastructure maintenance operators - including Vocus Group, TPG Telecom, AirTrunk and Ventia - are also seeing their loan costs rise.

James Poulos, head of loan markets and syndications for Australia and New Zealand at MUFG, said: "New client money may be harder to get hold of without an appropriate cost premium, as banks are focusing on existing key clients and defensive sectors."

Australia's A$2 trillion (S$1.9 trillion) economy shrank 0.3 per cent in the first three months of 2020 as many businesses were forced to shut to contain the spread of the coronavirus.

If the Australian Bureau of Statistics confirms another contraction in the second quarter - usually announced in September - it would mark the country's first recession since the early 1990s, ending the developed world's longest growth streak.

S&P Global Ratings estimates Asia Pacific will lose US$2.7 trillion of economic output this and next year as a result of the pandemic, with GDP trends normalising in 2023 at the earliest.

"We expect most institutions in the region will show a multi-fold rise in credit losses and a sharp drop in earnings in the next two to three years due to the Covid-19 induced economic downturn," said Sharad Jain, a credit analyst at the ratings firm.

Based on the current climate, non-bank lenders are also reassessing corporate pricing benchmarks and weighing appropriate risk returns.

"Some transactions are being done on terms and conditions that you might think are aggressive, and then there are others where margins, pricing and terms and conditions seem overly generous to lenders," said Andrew Lockhart, managing partner for Metrics Credit Partners in Sydney. "That suggests to me that we haven't got to a position where you've got enough consistency of transaction volume for the market."

Syndicated and club loan volumes in Australia bucked the downward trend seen in most major markets across Asia Pacific in the first half, rising nearly 20 per cent year on year to US$45.1 billion, according to Refinitiv LPC data.

Refinancing, amendments and extensions drove the bulk of activity as borrowers sought to shore up liquidity amid the pandemic.

However, it remains to be seen whether Australia will be able to produce similar volume numbers in the second half given that most of the companies with urgent liquidity needs have already completed their fundraising plans in the first half.

"Demand for financing is very high, particularly in commercial real estate lending and event-driven acquisition finance transactions," said Metrics' Lockhart. "We see good deal flow and activity for a lot of private equity sponsors that have got a lot of capital and are looking to deploy that into opportunistic transactions." REUTERS