Matthew Stevens | November 15, 2008 Article from: The Australian INCITEC Pivot did it on Thursday, CSR is trying to do it right now, and Mark Rowsthorn's Asciano seriously needs to get doing it and pretty quickly too. Raising new equity is suddenly all the rage.
One of the trends being clearly established is that Australian corporates are moving quickly to replace debt with new and potentially expensive equity in response to the global financial crisis and liquidity drought in once-flooded corporate capital markets.
According to some fascinating work by Merrill Lynch's retail banking team, this trend looks certain to intensify over the coming two years.
Merrill's thesis rests on a belief that Australia's institutional lending space is headed for more dislocation because a powerful cohort of foreign banks is considering withdrawal from the market.
The shift would occur for two distinct but connected reasons.
First, the drive to shore up capital positions in the wake of $1 trillion of writedowns could force major global banks to reduce their exposure to non-core locations such as Australia.
Then any inclination to retreat would be amplified in markets where governments had delivered deposit and funding guarantees or provided equity to local banks. Australia, of course, fits that bill.
Merrill has identified 20 foreign banks it believes will retreat from the Australian system and then credits them with 19 per cent, or $54 billion worth, of the $285 billion of Australian corporate debt syndicated since 2006.
"While 19 per cent of the total balances is unlikely to place particular stress on the broader system to absorb, we do note that the retreating banks are somewhat overweight in syndicated debt that is due to be refinanced over the next 24 months."
As Merrill notes and the likes of Centro Properties' Glenn Rufrano keeps reminding us, it often takes only one bank to upset a syndicate.
According to Merrill's data, about $76 billon of syndicated debt has to be refinanced over the next two years, with the bulk of that occurring in 2010.
Some 22 per cent of that debt is currently held by banks in Merrill's retreating class. That means others in those syndicates, particularly the big domestic banks, will have to find perhaps another $17 billion if those facilities are to be extended.
"Given the current state of credit markets, the question remains the extent to which banks will be in a position to continue to extend credit to corporates as debt matures.
"This is exacerbated by the fact that a number of the offshore banks that have heavily participated in the Australian syndicated debt market are facing capital constraints that are likely to pressure their ongoing participation in Australian syndicated facilities," Merrill's report says.
The implications of the shift being signalled by Merrill are that Australian banks will have an opportunity to acquire a greater and, probably, more profitable share of the corporate debt market; that companies will increasingly seek to retire debt by going to equity markets; and that our bad debt issues may get a whole lot worse.
Bad debts were the issue du jour in Australian banking this week, and promise to be so for some time.
The current target for market ire, though, is Commonwealth Bank chief executive Ralph Norris, who irritated analysts by foreshadowing that bad debt expense could double to $2 billion this financial year. The irritation with Norris is not so much that he has been caught with singularly large exposures to a cluster of high-profile problems, such as ABC Learning Centres and Allco Finance Group.
Rather it is that the bank did not aggressively provision against these situations in its 2008 results.
Deutsche Bank's Ross Brown probably best summed up widespread attitudes, writing: "CBA confirmed that the key reason for the higher loan loss expectation was provisioning for ABC Learning, Allco and Lehman Brothers. What surprised us was that these have been known problem exposures for some time, especially ABC Learning and Allco.
"While no data was provided on the extent of any increase in collective provisioning, CBA's ratio of collective provisions to non-housing gross loans at 80 basis points is well below NAB (109 bps), Westpac (123 bps) and ANZ (156 bps)."
JPMorgan's Brian Johnson was similarly curt: "This is particularly disappointing as these impaired exposures, while not previously in receivership, were well known and intuitively should have been covered by FY08 collective provisioning."
The banks, on the other hand, consistently tell us provisioning has nothing to do with intuition and everything to do with establishing the certainty of loss.
For mine, it seems a bit rich to criticise Norris for being tardy on provisioning. Whether the hit is taken this year or next is not really of much consequence, surely. Where Norris deserves to be hammered is that he allowed Which Bank to accept and then maintain a $650 million, unsecured position in a business like ABC.
