Bond markets have been supported by some market-friendly data and while Fed speakers were again mixed, it was the more dovish remarks that captured attention.
Supportive loans window for corporate borrowers
Following a very busy end to 2021 driven by the emergence of M&A activity, loan markets in Australia for corporate borrowers look strong moving ahead.
2021 was another record year in the Australian loan market1 after starting with a COVID-19 hangover. Borrowers were not clear if “now” was the right time to be approaching market and banks were still carefully considering what impact the pandemic would have on some sectors and being cautious.
Remember it was not clear at the time what the exact impact of COVID-19 would have on the economy. Signs were good, with government support providing an excellent base for recovery, however M&A activity was paused and spending on growth capex was delayed, waiting to see the result of stimulus. Much hard work had been done in the past years on refinance and liquidity lines were in place so there was additionally low urgency.
Notwithstanding these conditions, loan bankers knew market conditions were sound for anyone needing to approach market. Bank appetite inside the guardrails remained good and infrastructure financing was still receiving strong attention.
Conditions however improved strongly through the year and M&A activity and underwriting helped drive volumes.
Moving forward to the second half and concerns disappeared while enthusiasm for both new money through acquisition finance and refinancing via amend and extend appeared, taking advantage of good pricing conditions. The COVID-19 recovery was strong. Bank funding costs were still being supported by excellent funding conditions, the term funding facility and other liquidity support.
Into the last quarter the grey clouds of tightness in employment conditions and inflation started to impact markets. The obvious question for loan markets was what impact increasing interest rates would have on bank funding conditions.
Inflation is not leaving us in the short term and global central banks are responding, cutting quantitative easing and openly indicating increased interest rates and even quantitative tightening. Bank bond secondary spreads widened first, then the first new issuance post cessation of the term funding facility proved term borrowing levels for banks wider2.
Regardless, Australian loan market conditions remain very supportive for borrowers. Foreign lender activity in Australia remains strong, allowing large books to be built during syndication to generate significant volume. Underwriting activity has been consistent and available, reflecting confidence from market practitioners and banks in loan market conditions and the ability to distribute credit.
So what about 2022?
Current conditions are good but the backdrop is less confident. Bond markets look set for weaker conditions during the year and as they may provide a less attractive option for issuers, a turn of volume back to loan markets may occur. If that coincides with funding cost pressures on bank funding lines it could put pressure on current attractive overall loan market conditions.
The appetite cliff remains as well, being outside the policy guardrails has not been a great place to be over the past two years even in good market conditions, with care and time needed to get deals done.
Everything says take the window while it remains available and we expect a very busy first half 2022.
1 Reuters LoanConnector Annual Market Volumes, Australia
2 Observed levels on ThompsonReuters Eikon