Hi all, NEA does have a capacity to take on debt if needed. Very...

Hi all,

NEA does have a capacity to take on debt if needed. Very simplistically, they would put up the A$20-25m EBIT that NEA (Australia) makes - subtract about $5m for unallocated Aust expenses and use this for collateral and loan service. Prior to Covid-19, this would have been (generally) good enough for a A$40-60m 4-5 year facility. And NEA (if they have any active strategy of optimising their growth capital options) would have advanced and maintained a few indicative term sheets for standby facilities with several banks for the last year or so.

Its just that right now, banks are bracing for a rapidly weakening loan book and credit committees are under great pressure to take on only the highest quality loans. This is despite the recent easing of capital reserve ratio restrictions as banks are going to want to get a better handle on whats coming at them before they exercise their new lending capacity any material way. However, that's not to say NEA wouldn't currently have a chance...it just means that what they could access would very likely be less and more expensive with tighter covenants.

In the last month and despite record low RBA rates, corporate debt has blown out some 300-500 points so NEA would (currently) be lucky to get a single digit rate. Yet the headline rate will not be the deciding factor for NEA; its more likely to be the tighter repayment metrics/ratios and conditions that'll narrow the cost difference between equity and debt capital options.

Either way, all companies are very actively reviewing and updating their capital requirements/models and I would not be surpised at all (even encouraged) if NEA added a bit more free-board to their balance sheet within the next 6 months.

Cheers,