Westpac Bets on $72 Billion Australia Road to Rail BoostPaulina Duran
Australian banks are set for a lending boost as Prime Minister Tony Abbott champions ventures to revitalize the economy, accelerating some of the more than A$80 billion ($72 billion) of infrastructure projects.
The upgrade of Sydney highways and a Melbourne-to-Brisbane railway are among proposals being part-funded by the government, as Westpac Banking Corp. estimates such projects will need as much as A$20 billion of bank debt over the next two years. Syndicated loan volumes in Australia have risen by 32 percent this year, compared with a 6 percent increase in the Asia-Pacific region, according to data compiled by Bloomberg.
Abbott’s acceleration of the projects, after dubbing himself an infrastructure prime minister, is crucial to spur growth in an economy suffering from a cooling mining investment boom. Banks are relying on the ventures to boost fees, as the value of mineral and energy projects committed or under way fell 3 percent from a March peak compared with a 10 percent rise in non-resources deals since then, according to Deloitte LLP.
“It’s becoming clear the federal government is going to stimulate infrastructure investment,” said John Chauvel, the Sydney-based head of debt capital markets at Westpac, which has helped arrange the most syndicated loans in Australia this year. “In the next 18 to 24 months, we certainly expect a significant increase in activity. Roads, rails and port facilities will continue to be a key focus in the near term.”
Australia faces an infrastructure funding gap of about A$300 billion, according to a June government report. Capital is needed for essential projects to help prepare for an expected 50 percent surge in population by 2050 and rising demand from Asia for the nation’s exports, according to the government’s Infrastructure Australia unit. It put the value of proposed priority investments at more than A$80 billion.
The Liberal-National coalition, elected to office three months ago, has committed about A$11.5 billion to projects. They include A$1.5 billion for the East West Link, an 18-kilometer (11.2 mile) highway across Melbourne, and the same amount for WestConnex in Sydney, a 33-kilometer road winding through the suburbs of Australia’s most-populated city.
“It’s doubtful there’s sufficient greenfield capex expenditure from economic and social infrastructure projects to replace dollar for dollar what’s coming off in the mining and oil and gas sectors,” David Byrne, the global head of utilities and infrastructure at Australia & New Zealand Banking Group Ltd. in Melbourne, said in an interview.
The Treasury forecasts spending on energy and mining projects will fall to less than A$20 billion a year in fiscal 2017, from A$68.5 billion in 2013. That’s an opportunity for infrastructure investment to rise and assist the economy’s “necessary” rebalancing, Reserve Bank of Australia Deputy Governor Philip Lowe said last month.
The economy expanded slower than analysts forecast last quarter, suggesting the RBA may need to do more to spur spending as the country’s mining boom wanes. The central bank has cut rates by 2.25 percentage points in the past two years to engineer a transition to other industries. Interest-rate swaps show the odds of a further cut to 2.25 percent or less in the first half of 2014 are 32 percent.
The paring back of rate-cut bets along with rising U.S. Treasury yields helped drive Australia’s 10-year government rate to 4.44 percent at 4 p.m. in Sydney, heading for the highest close since October 2011. The Australian dollar bought 90.58 U.S. cents, down 13 percent since Dec. 31.
The state of New South Wales, which governs Sydney, has allocated A$3.3 billion toward an 18-kilometer railway project in the city’s north-west, which it’s building in partnership with private investors. Two groups comprising almost 30 companies have been short-listed to deliver the venture, according to Transport for NSW’s website.
A group led by Canada’s Bombardier Inc. borrowed more than A$1 billion from 11 banks to help fill the largest train order by Queensland state, two people familiar with the matter said last week. Lenders to the New Generation Rollingstock project, which will deliver 75 new six-car trains, included ANZ and Commonwealth Bank of Australia, the people said.
“Global investors are looking for low risk alternatives, and infrastructure -- debt and equity -- is very compelling,” said Brett Himbury, chief executive officer of IFM Investors Pty in Melbourne, which manages A$48 billion. “In our view, there are less opportunities than there is capital available.”
In April, IFM and a unit of Abu Dhabi Investment Authority led an investor group which paid A$5.1 billion to lease Sydney’s Port Botany, the nation’s second-biggest container terminal, and Port Kembla, also in NSW. Ten lenders including ANZ, National Australia Bank Ltd. and Bank of Tokyo-Mitsubishi UFJ Ltd. lent A$2.02 billion to the consortium, according to Bloomberg-compiled data.
Banks led by Westpac and ANZ have boosted Australian syndicated loan volumes to $79.3 billion this year, compared with $60 billion for the year to Dec. 6, 2012, according to data compiled by Bloomberg. About $59 billion of this year’s loans helped finance non-resources related companies, a 33 percent increase from 2012, the data show.
As tighter controls on capital restrict banks from providing longer-term debt to projects, institutions and state-backed export credit agencies are increasingly filling that gap for both resources and infrastructure ventures. Support from ECAs to global projects has increased to more than $30 billion forecast this year, from less than $10 billion in 2009, according to a Baker & McKenzie LLP report.
“If there’s an ECA in there, commercial banks are more willing to lend to a project,” said Sean Rush, a Sydney-based partner at Baker & McKenzie. “What the ECAs are bringing to the market is longer tenor debt.” Billionaire Gina Rinehart’s A$10 billion Roy Hill mining development, which is seeking about A$7 billion of debt, would have been less attractive to banks without ECA support, he said.
To spur private investment, Australia is considering incentives for infrastructure spending, while also encouraging sales of state assets to free up capital for new ventures. There’s a A$120 billion pipeline of potential asset sales, with about A$50 billion of those proceeds enough to trigger upgrades in states’ credit ratings, ANZ estimated in September.
“Most of the state governments have different initiatives around selling, privatizing, and then recycling that capital into new infrastructure assets,” said Westpac’s Chauvel. “Not only will that privatization increase activity in the financial markets, but then that capital will be recycled into new assets, which will also generate growth.”