Australia Inc. Loans Can't Get Much Cheaper Than This, Banks Sayby
Syndicated loan volumes have fallen 27% from last year
`We have largely seen the bottom for loan pricing': ANZ
Australian companies have been spoiled by cheap loans for long enough. Life may not be so easy in 2016.
After competition squeezed syndicated loan margins to less than 1 percent over the last two years, arrangers including Australia & New Zealand Banking Group Ltd. say the bottom may have been reached. Shipbuilder Austal Ltd. paid just 75 basis points over the London interbank offered rate for three-year debt last month, the least in Bloomberg-compiled data for 2015.
Higher borrowing costs offer one less incentive for investment activity, which fell a record 9.2 percent in the third quarter as companies adjust to the end of a mining boom. Delayed projects contributed to a 27 percent drop in loan volumes to A$115 billion ($83 billion) in 2015. Australian banks forced to maintain stronger capital buffers are now under pressure to pass on higher funding costs.
“We believe we have largely seen the bottom for loan pricing, given we believe we have seen the bottom for bank funding costs for the near term,” said Robin Dutta, Sydney-based head of Australian loan syndications at ANZ, the biggest lead arranger this year. “The extent of any widening in 2016 will be a function of broader loan market appetite, bank capital return hurdles, public market volatility and mergers and acquisitions loan volume.”
The pipeline is so far looking healthy. There’s at least A$20 billion of deals including project finance, M&A funding and refinancing expected to complete or be backed by new loans in 2016, according to data compiled by Bloomberg.
About 40 percent of loans signed this year replaced or extended existing debt, making up the biggest portion of deals as companies raced to cut their borrowing costs while money was cheap. Average margins on three- and five-year loans were 157 basis points and 196 basis points over benchmark rates respectively in 2015, according to data compiled by Bloomberg. Costs were about 40 to 50 basis points higher two years ago.
“Many sponsors have refinanced early to take advantage of low pricing,” said Robert MacIsaac, head of project finance for Australia at Bank of Tokyo-Mitsubishi UFJ Ltd. “Because we have already seen significant refinancing activities done in the past year, we can expect to see less next year. I hope that the new privatization pipelines and PPP deals would be able to fill those gaps and drive volumes in 2016.”
The New South Wales state government last month agreed to privatize electricity company Transgrid via a 99-year lease to a consortium including Hastings Fund Management. The deal is backed by a multi-tranche A$5.5 billion loan paying 85 basis points for the three-year portion, and is being sold down by its underwriters, people familiar with the matter said Dec. 9.
Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Credit Agricole SA are syndicating part of a A$1.5 billion loan backing Sydney’s long-awaited WestConnex motorway project, with the deal expected to close in January, people familiar with the matter said last week.
New South Wales also plans to sell partial leases of power distributors Ausgrid and Endeavour Energy, which bankers expect to boost loan volumes in 2016, while lenders are still waiting for the Victorian state government to lease the Port of Melbourne in a deal which has been expected for more than a year.
“Infrastructure financing will continue to be an interesting source of deal flow for Australia next year,” said Siong Ooi, Hong Kong-based head of Asia-Pacific leveraged finance and loans at Bank of America Merrill Lynch. “Many companies have a lot of firepower to bid for assets.”
Transurban Group last month announced plans to expand its Queensland toll-road business by acquiring the AirportLinkM7 in Brisbane for A$1.9 billion, and is seeking a A$950 million loan to back the purchase. The Australian loan market has provided solid support to M&A deals this year, and that should ensure even greater activity in the space in 2016, according to Andrew McDermott, Sydney-based head of syndications in Australia at Mizuho Bank Ltd.
Borrowers could pay up to 20 basis points more in 2016, according to bankers. Lenders are already paying more to fund themselves in Australia, with the average yield premium over the swap rate for financial company bonds at 98 basis points on Tuesday, compared with 74 basis points a year earlier, according to the Bloomberg AusBond Credit Index.
“Whilst cost of funds pressures are likely to see loan pricing widen in the short term, the market remains very competitive and this is keeping loan pricing down,” said McDermott.