Debt opportunities remain for smart players
In recent days we’ve heard fears expressed that credit markets have ground to a halt as result of COVID-19: that’s not the case. While bank and non-bank lenders are certainly cautious, markets are very much still open and functioning.
That means there’s a real chance for businesses to learn the lessons of the GFC and not be caught sitting on their hands when liquidity is available to set-up for a post-crisis environment. But what are the factors that need to be considered first?
Cost of credit rising, but will be mitigated
The profile of borrowers that lenders will provide funding to – and the price at which they will advance that funding – has changed swiftly as a result of the pandemic.
The coronavirus-triggered increase in the cost of credit could be anywhere between 50 and 150 basis points or higher, depending on where you fit in the credit spectrum.
Offsetting this, however, is the fact that interest rates have reduced and will fall further as the RBA is anticipated to announce further rate cuts as early as tomorrow. This means that any increase in margins in the short term is likely to be partially offset by the reduction in the base rate.
Banks have liquidity ready
The strong message we are getting from the banks is that they are open for business with liquidity to deploy.
Australia’s major banks are well capitalised and have buffers in place to ride the wave of events like the current pandemic. With these factors considered, along with the scope of the RBA to provide additional support, we believe the banking system is well placed to continue supporting long-term growth.
We also think our major banks will be keen to step up and support their customers – partly out of recognition of their role in this crisis and partly because they know it’s in their best interests to keep things moving.
Want funding? Need a solid plan
Let’s be clear: It won’t be straightforward for most businesses to secure credit in this environment. That’s especially the case if you operate in a vulnerable sector severely impacted by COVID-19.
All lenders will approach you with caution and the hurdles to get approvals will be higher than they have been. We’re hearing some new-to-bank sign offs will now automatically go to the national head of credit, and maybe even offshore for foreign banks, for approval.
A number of businesses are saying they need to improve their liquidity position to deal with the short lived cash flow implications of coronavirus; that’s going to be hard to achieve quickly. Yet lenders will also be aware of the fact that if you have a sound business model, then roll the clock six to 12 months forward you’ll largely be back to business as usual.
So if you need additional liquidity, what the debt market or equity market will want to see is a clearly articulated plan, endorsed by your board, to get back to a normalised position.
Consider the alternate funding options that weren’t available during the GFC
Australia has experienced a massive influx of new players into the private credit market over the past decade. Many of these players are currently sitting on significant quantities of dry powder. Our expectation is that while these lenders will be cautious, and eager for a healthy return, they are under some pressure to deploy their money as well. There remains some healthy tension in the market if you know where to look.
The culmination of these factors makes the current situation significantly better for borrowers than it was in 2009/2010. Back then, given the position of the banks and the significant cost of accessing the equity markets for listed companies, many companies had limited options that meant many just rode the crisis out. Today that may not be necessary.
The time to start planning for post-crisis is now
So whether you’re assessing the merits of recapitalisation, seeking to structure a plan to present to lenders, or looking for advice on engaging with the new private credit market it is important that you have a robust capital plan in place. This plan needs to cover the medium term outlook and incorporate all of the alternative funding solutions that cover multiple scenarios.