April 6, 2020

Corporate borrowers cautious as markets see-saw

With public debt markets in flux due to the spread of COVID-19, patience is the watchword for Australian borrowers in private capital markets.

Recent wild swings in global credit markets triggered by the spread of COVID-19 have put a temporary hold on most domestic corporate bond and loan transactions, but borrowing demand from companies will re-emerge once markets stabilise.

That was the key message from National Australia Bank (NAB) experts in a recent panel discussion on the funding process for both rated and unrated borrowers to access capital markets.

“With the volatility in the bond market, there will be upward pressure on pricing until markets stabilise,” said Mark Bower, Head of Corporate Origination at NAB. “The continuing widening of various credit indices point to primary loan pricing widening over coming weeks and months.”

“In the short term we’re in a state of flux – it’s difficult to engage investors for now, but when the volatility settles down we’ll start seeing some trades again,” Bower said.

The Reserve Bank of Australia, like its counterparts around the world, has slashed interest rates and introduced special measures to support the bond market and bank lending1. The RBA established a A$90 billion term funding facility to help banks continue to lend, which is expected to have a positive influence in alleviating funding pressures and allowing greater support in funding business.

The Federal Government has announced three wide-ranging support packages to cushion the economic downturn and act as a “bridge” to recovery, including income support measures. NAB has introduced a support package for small business and personal customers to pause or defer loan repayments, as well as further measures including low-rate loans for small business.

“These are volatile times for markets, companies, and individuals and we’ve seen constructive responses and cooperation between governments, banks, investors and borrowers who are all seeking to overcome the immediate challenges associated with the spread of COVID-19, and NAB is seeking to play its part,” Bower said.

Here for the long haul

While bond markets are quicker to react than loan markets with wider spreads and a slowdown in issuance, the overall cost of debt for borrowers remains near historical lows.

A Cbus Super executive said the industry funds that have started direct lending to corporates are watching events closely, but are not likely to pull back from lending despite the short-term swings in markets.

“Our strategy is unchanged,” said Linda Cunningham, Head of Debt and Alternatives at Cbus Super, a $55 billion industry super fund that is providing debt directly to Australian corporates, infrastructure and property development projects.

The panellists discussed the expansion of private capital markets over the past couple of years, for both small-cap and mid-cap ASX listed firms and for non ASX-listed or unrated companies. “The volume and liquidity has grown dramatically, particularly in the unsecured subordinated markets,” said Andrew Ting, Director, Corporate Origination at NAB.

Diversity in funding sources

While listed companies can tap over-the-counter bonds as well as senior bank debt, the trend for private companies has been towards including junior or subordinated debt into the capital stack as a way to bridge equity shortfall, and in the private equity sponsor space to blend with senior debt into a uni-tranche option.

“These capital structuring options have proved attractive as a way for companies to diversify their debt funding sources. It gives them more flexibility, which is really important in the current environment when there is more choppiness around markets. The companies with more nimble, flexible structures will be better placed than relying on a single market,” Ting said.

Driving the non-rated debt market in the medium and long term is the appetite for fixed income overall as investors seek to diversify their portfolios.

NAB has worked closely with our superannuation fund clients to help them lend directly via the institutional term loan market to privately held or ASX listed companies. These borrowers may be looking for a longer tenor than the three to five years typical of bank debt; non- rated; or a smaller issuance than is usually available in the U.S. private placement market.

“We have a pool of partners and capital that can fill that niche for many companies,” said Bower.

Cunningham told the panel that Cbus Super was interested in lending in the longer tenor space, where the borrowing needs of companies more closely match the return for risk profile that the fund is looking for.

“It is a market that continues to evolve, and our intention is that we invest for the long term,” she said.


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1 https://rba.gov.au/media-releases/2020/mr-20-08.html