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Foreign Banks May Withdraw From Aussie Corporate Loan Market
Foreign banks with Australian operations are considering abandoning the domestic loan market altogether. Such a move would mean that Australian borrowers would be pushed into tight corners facing serious funding pressures.
Merrill Lynch, an Investment Bank estimates A$ 54 billion of debt by just 20 banks. Banks who may decide to retreat to their home markets because of their own capital and credit impairment of their own issues.
Merrill thinks that around $150 billion of $285 billion in domestic syndicated debt is on the balance sheets of offshore banks, with $54 billion held by “retreating” lenders that are likely to be rationing credit in Australia. Whilst this creates a great opportunity for local banks to refinance at much better margins, local banks would also be forced to raise more capital in order to support increased lending. Contrastingly, it is possible that some syndicates may collapse altogether, resulting in potential bad debts which would hurt the economy greatly.
A scenario could occur where a corporate borrower finds itself in trouble because one of its syndicate members is unwilling for their own reasons, to refinance an existing syndicated facility, The Investment Bank says “In such a situation other members of the syndicate may elect not to fill the gap left by the exiting bank, the borrower may be forced into an early workout or liquidation scenario, which could potentially result in a larger bad debt for the banks involved.
Merrill says global banks have now raised more than $800 billion to shore up their capital positions after nearly $1 trillion of write-downs. Australian Real estate investment trusts, which have absorbed 16 per cent of the $285 billion in syndicated debt raised since 2006, are the most likely to be affected by any retreat of the offshore banks, followed by infrastructure and financial services, each with 9 per cent.
Merrill reckons that the focus of lenders is likely to move from non-core markets such as Australia particularly when they are pressured by governments, which have introduced deposit and term funding guarantees to direct scarce capital to domestic markets. It is no wonder that Foreign banks which do not have the benefit of government guarantees on their deposits or a quasi sovereign rating on their debt issued in the international wholesale money markets, are thinking about beating a hasty retreat.
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