07 May 2019
What is the state of play in Australian loan markets right now and what is the outlook for the foreseeable future for corporate and institutional borrowers and alternative online finance?
While regulatory headwinds stirred up by the Banking Royal Commission and the recent increase in market risk capital requirements for banks by the Basel Committee will no doubt have an effect on the lending landscape, all indications are that demand from alternative lenders will continue to increase.
2018 saw a strong syndicated loan market in Australia, with great support for investment grade credits. The availability of credit at this level was high and spread across industries. Key features were the volume of underwritten loans (from both banks and institutional investors), driven by acquisition finance and stable market conditions (in contrast to the periods of volatility which at times closed down activity in the Australian bond markets).
Demand from institutional investors (such as Metrics Credit Partners and super funds) continued to grow and extended to unrated borrowers. These conditions resulted in important upside for borrowers, including:
Thus far, 2019 has seen a variety of Asian banks establishing or (together with certain European Banks) expanding operations in Australia, coupled with the trend of increased participation by institutional investors.
Conditions at the start of 2019 were very strong, particularly for corporate borrowers of good standing. This was illustrated early this year by the Australia Pacific LNG (APLNG) refinancing, which was oversubscribed by more than 100%, leading to a request for, and receipt of, better terms and pricing.
However, syndicated lending in the Asia Pacific (excluding Japan) in the first quarter of 2019 dropped by almost 40% – despite the fact that event-driven financings in Australia have been healthy. The trade war between the US and China and concerns about the global outlook appear to have resulted in some borrowers adopting a wait and see approach.
Regulatory headwinds stirred up by the Banking Royal Commission will no doubt have an effect on the lending landscape. For example, among Australian banks, tighter lending standards and improved ethical behaviour could perhaps result in lower loan volumes.
In addition, the Basel Committee increased its minimum capital requirements for banks for market risk in January and again in February this year. The result of this is that bank regulators (including APRA) will be expected to require an increase in in total market risk capital requirements relative to the Basel 2.5 framework. While the increase does not commence until January 2022, banks are beginning to take compliance steps. The effect of this on loan markets is not clear at this stage. However, it could have an effect on availability of bank credit, in particular for longer tenors.
Nevertheless, all indications are that demand from alternative lenders will continue to increase for the remainder of this year and the foreseeable future, as funds they have under management or access to increase. Thus, while the make-up of lending syndicates may change, the availability of loan credit is expected to continue. The question is whether there will be any gap as a result of the changing environment for the banks.
Now would be an opportune time for borrowers to consider taking advantage of the liquidity available in the market to refinance debt on improved terms and, prior to any potential downside from the recent decisions by the Basel Committee, potentially expand their universe of financiers beyond traditional bank lenders.
According to the 3rd Asia Pacific Region Alternative Finance Industry Report, Australia is the largest alternative (online) finance market in Asia Pacific (excluding China) with 36 platforms and over US$1.14 billion raised in 2017. The largest share of market volume came from balance sheet business lending, followed by P2P/market place consumer lending. Invoice trading was the next largest segment of the market.
While the amount raised in 2017 is small in the context of the corporate and institutional market, the Report notes that the average growth rate in 2017 was 88%.
Could the online alternative finance market become a viable source of funds beyond SMEs? The next few years should answer that question, and it would certainly be worthwhile keeping an eye on developments in this area.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.