I feel I should clarify my position. My sentiment is still a buy and I still believe we will get there but I wanted to ensure everyone knows at what cost this likely will be (and my original point was countering that interest rate competition will drive down AVB's interest rate).
A low risk corporate loan in the current world you currently can expect spreads fixed at around 3 to 4 % over interbank rates. There are a whole bunch of factors that drive this price, including bank internal treasury spreads to cover treasury operating costs (transfer pricing), regulatory capital requirements (banks have to hold capital in reserve based on the risk rating of the debt which costs money) and provisions (banks write off P&L at the start of a deal again based on risk ratings to reduce shock should the deal default. If the deal does not default this P&L is realised at the end of the deal.
To give you an idea when I first started in corporate banking large corporates (and I'm talking ASX 200 listed companies here) were even then paying interest rates well above the rate on my home loan. This was before the GFC when spreads blew out even more. Corporate debt is more expensive than home loans because the property market is a lot less volatile - a lot of the value of large corporates lies in goodwill and market reputation, both of which can be wiped out very quickly
AVB's loan from a pure banking perspective is reasonably high risk:
- sale value of the mine/assets vs the loan amount
- cashflow projections should copper prices drop etc
- single point of failure - if the current mine goes wrong for whatever reason there is no alternative source of cash
This means provisions, capital requirements etc will be higher, hence my guess on spreads. As an example I recently was witness to a corporate deal that was done at a fixed spread of 11% over the 90 day BBSY rate in Australia.
That said I believe we will know shortly what is happening with finance. I suspect the delay at the moment has been based on getting another bank into the syndicate. As mentioned the other bank will do equally as much DD on AVB as BV did - any bank buying into the syndicate has recourse only to AVB so they are 100% entitled to do full credit risk assessments. Again not to say we won't get there but I am being mindful of the risks rather than carte blanche calling everything as a given.
Syndicated loans take time. Corporate loans in general take time and rarely have I ever seen a deal meet its original expected close date. As soon as you bring in another bank you now have a 3rd set of lawyers at the table when agreeing every..... single....... freaking....... word......... in the credit agreement contracts and syndication agreements (and we're talking docs that are minimum 30 pages for the simplest of deals - smallest syndicated loan agreement I've seen was around 60 pages).
Remember the banks have the power here - not AVB. We might have a gun finance negotiator but it means squat unless there are banks knocking down our door to give us money on the same terms. There may have been other banks that offered finance termsheets previously but we would have selected the one that was on the best terms for us (BV), meaning any other banks coming in may not have wanted to offer the same conditions, pricing etc.
Like a lot of others I am looking forward to the finance chapter being closed off. I've stated before it will be further validation that AVB has got the goods and (to use an awful HC cliche') further de-risking.
Good Luck all
AVB Price at posting:
8.9¢ Sentiment: Buy Disclosure: Held
