Aussie firms look to have hit the bottom on cheap loans
Australian firms have been spoiled by cheap loans for long enough. Life may not be so easy in 2016.
After competition squeezed syndicated loan margins to less than 1 per cent over the past two years, arrangers including Australia & New Zealand Banking Group say the bottom may have been reached.
Shipbuilder Austal paid just 75 basis points over the London interbank offered rate for three-year debt last month, the least in Bloomberg-compiled data for 2015.
Higher borrowing costs offer one less incentive for investment activity, which fell a record 9.2 per cent in the third quarter as companies adjust to the end of a mining boom.
Delayed projects contributed to a 27 per cent drop in loan volumes to A$115 billion ($121.9 billion) in 2015.
Australian banks forced to maintain stronger capital buffers are now under pressure to pass on higher funding costs.
“We believe we have largely seen the bottom for loan pricing, given we believe we have seen the bottom for bank funding costs for the near term,” said Robin Dutta, head of Australian loan syndications at ANZ, the biggest lead arranger this year.
“The extent of any widening in 2016 will be a function of broader loan market appetite, bank capital return hurdles, public market volatility and mergers and acquisitions loan volume.”
The pipeline
is so far looking healthy. There’s at least A$20 billion of deals including project finance, M&A funding and refinancing expected to complete or be backed by new loans in 2016, according to data compiled by Bloomberg.
About 40 per cent of loans signed this year replaced or extended existing debt, making up the biggest portion of deals as companies raced to cut their borrowing costs while money was cheap, the data showed.
Average margins on three- and five-year loans were 157 basis points and 196 basis points over benchmark rates respectively in 2015.
Costs were about 40 to 50 basis points higher two years ago.
“Many sponsors have refinanced early to take advantage of low pricing,” said Robert MacIsaac, head of project finance for Australia at Bank of Tokyo-Mitsubishi UFJ.
“Because we have already seen significant refinancing activities done in the past year, we can expect to see less next year. I hope that the new privatisation pipelines and PPP deals would be able to fill those gaps and drive volumes in 2016.”
The New South Wales state government last month agreed to privatise electricity company Transgrid via a 99-year lease to a consortium including Hastings Fund Management.
Commonwealth Bank of Australia, National Australia Bank, Westpac Banking and Credit Agricole are syndicating part of a A$1.5 billion loan backing Sydney’s long-awaited WestConnex motorway project, with the deal expected to close in January, people familiar with the matter said.
NSW also plans to sell partial leases of power distributors Ausgrid and Endeavour Energy, while lenders are still waiting for the Victorian state government to lease the Port of Melbourne in a deal which has been expected for more than a year.
“Infrastructure financing will continue to be an interesting source of deal flow for Australia next year,” said Siong Ooi, Hong Kong-based head of Asia-Pacific leveraged finance and loans at Bank of America Merrill Lynch. “Many companies have a lot of firepower to bid for assets.”