Bankers Squeal as Origin to AMP Slash Costs: Australia Credit
Australian companies have cut more than a percentage point off loan margins as banks compete to refinance $111 billion of debt maturing within two years.
Borrowers paid an average cost of 223 basis points above the bank bill swap rate in the third quarter, compared with 333 basis points a year earlier, data compiled by Bloomberg show. Australian syndicated loan volumes surged 18 percent this year, compared to little change in the Asia-Pacific region outside of Japan. AquaSure Pty, the builder of a water plant in Victoria state, more than halved borrowing costs when it refinanced a A$3.7 billion ($3.6 billion) loan this month.
Lenders including Australia & New Zealand Banking Group Ltd. (ANZ) and National Australia Bank Ltd. (NAB) are being forced to accept lower margins to win syndicated loan business as the pace of the nation’s overall credit growth slows amid a waning mining boom. Companies seeking to refinance debt are taking advantage of that rivalry before an expected end to U.S. stimulus policies and the Reserve Bank of Australia’s easing cycle.
“Banks are squealing in terms of where pricing levels are,” Gavin Chappell, the Sydney-based head of loans and syndications at Westpac Banking Corp., said in an interview. “Pricing will stabilize from here. The only thing that could drive pricing considerably lower from here is a significant reduction of funding cost for banks. But that’s unlikely.”
Origin Energy Ltd. (ORG) last quarter cut borrowing costs on A$7.4 billion of loans that it said were sufficient to refinance all existing bank debt. The facility included a five-year loan that paid 170 basis points above the bank bill swap rate, two people familiar with the matter said in August. That compares with the 220 basis points margin it paid on a similar-maturity loan in October last year, data compiled by Bloomberg show.
AMP Ltd. (AMP), Australia’s largest life insurer and pension manager, in August attracted about 20 banks when it refinanced a A$1 billion syndicated loan, which offered 110 basis points more than the swap rate for a two-year portion and 135 basis points on four-year debt, said people familiar with the matter. The margins were lower than those on the original 2011 deal, according to David Rowe, the company’s group treasurer.
“Pricing has been very competitive,” Sydney-based Rowe said in an interview. “It’s very clear that there’s plenty of money out there looking for a home.”
AquaSure last week said it completed a A$3.7 billion refinancing of loans backing its idled desalination plant. The Melbourne-based company cut interest margins to about 165 basis points more than the benchmark rate on money with a five-year maturity, said a person familiar with the matter last month. That compares with a 350 basis-point margin AquaSure paid on a five-year loan it arranged in 2009 to build the plant, according to Bloomberg-compiled data.
Banks led by ANZ and NAB have helped arrange $65.2 billion of syndicated loans in Australia this year, compared to $54.1 billion in the same period in 2012, data compiled by Bloomberg show. Total deals in the Asia-Pacific region outside Japan fell 0.1 percent, the data show.
“Borrowers have been getting a lot of calls from banks that are keen to lend, and from existing lenders also flagging their appetite,” said Stephen Boyd, Sydney-based director of debt markets origination at NAB.
Origin got more offers from lenders than it sought when it syndicated a A$5.4 billion portion of its facility, a person familiar with the matter said last month. It sold more of the loan to banks as a result, the person said.
Banks are seeking to keep business and secure new customers as the pace of credit growth slows. Overall annual lending to Australian businesses and consumers rose 3.4 percent in August, compared to 4.1 percent a year earlier, according to Reserve Bank of Australia figures.
Australia’s 10-year yield climbed 74 basis points this year to 4.02 percent at 1:36 p.m. in Sydney, after touching 4.28 percent on Oct. 16, the most since March 2012. The premium offered over similar-maturity Treasuries was 151 basis points, up from a six-year low of 96 basis points in August.
The Aussie dollar climbed to as high as 97.58 U.S. cents, the strongest since June, after government data showed inflation quickened more last quarter than economists estimated.
The volume of bonds sold in Australia by non-financial companies has shrunk to A$6.4 billion this year, down 29 percent from the same period in 2012, according to Bloomberg-compiled data. Many borrowers avoided selling bonds in the third quarter amid a widely-expected reduction of U.S. central bank stimulus that didn’t occur.
“In times of volatility, the loan market is showing it is a strong, reliable and flexible market and is consistently able to provide large volumes to borrowers when they need it the most,” said NAB’s Boyd.
Reserve Bank Governor Glenn Stevens will probably hold borrowing costs until at least May after cutting the benchmark to a record 2.5 percent in August, swaps indicate. Two months ago, traders saw better-than-even odds of a cut by the end of this year. The U.S. Federal Reserve will delay the first reduction in its bond purchases until March, according to the median of 40 responses in a Bloomberg News survey of economists.
Borrowers are also lowering costs by arranging their own facilities instead of paying banks to manage the deals. Amcor Ltd., the world’s largest packaging company, and Melbourne-based farm chemical supplier Nufarm Ltd. this month began talking to lenders bilaterally to refinance loans, instead of through a syndicate, according to people familiar with the matter.
Sydney-based Coates Hire Ltd., controlled by Carlyle Group LP and Seven Group Holdings Ltd., was last month able to agree more favorable terms on a A$1.75 billion loan that it also self-arranged, in a so-called “amend and extend” deal.
AMP’s Rowe is skeptical about the advantages of borrowers managing their own transactions.
“To be honest, I think the benefit of getting the deals done without the burden of having to rely on our internal resources outweighs the cost,” he said.
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