Australian companies are knocking on the doors of banks and even U.S. insurance companies for cash as the country’s corporate bond market, one of the region’s largest, has dried up this year amid the global credit crunch.

Volume in the loans and U.S. private bond markets has held steady at more than $43 billion, but corporate bond sales by non-financial firms have all but collapsed this year.

“Most corporations have two options, they can go to the bank market or the U.S. private placement market,” said Mark Garrick, managing director, global head of capital markets origination, at National Australia Bank.

Corporate bonds completely vanished from capital markets in the first half of the year against a total of A$6.5 billion ($5.7 billion) for the whole of 2007, Reuters data show.

Analysts warn such reliance on bank funding may jeopardise corporate expansion and also make debt markets less competitive.

Syndicated loans were by far the most favoured debt instruments this year, pulling in $42 billion, roughly the same amount as in 2007, according to Loan Pricing Corp data.

“Right now, there is greater reliance on the bank market to deal with corporates and their refinancing challenges,” said Chris Champion, managing director at Goldman Sachs JBWere.

Australia accounts for one third of Asia’ entire loan market and is far ahead of second rank Taiwan at $18 billion.

“The loan market is still active and deals are getting done,” said Gavin Chappell, director of debt capital markets in the loan division at Westpac Banking Corp.

The good run for loans looks set to continue and may even grow further in 2009 as mergers and acquisitions are expected to pick up after a slump in the first half of the year.

“We’ll start to see a slow increase in the number of M&A deals in 2009,” said Westpac’s Chappell.

CHEAP LOANS FOR BORROWERS

Loans have been increasingly attractive because they offer significantly lower rates than bonds, and that, despite a sharp increase since the credit crisis as banks themselves face higher funding costs.

Simon Milne, treasurer of gaming company Crown Ltd <CWN.AX>, estimates a gap of at least 2 percentage points between borrowing five-year money in the bond market and taking up a bank loan.

Crown, which is rated BBB by ratings agency Standard and Poor’s, has raised A$1 billion of debt this year in the syndicated loan and U.S. private placement market.

Australian fund managers, who traditionally buy bonds, have a range of investment choices with higher returns to choose from.

“Why would a fund manager buy a BBB-rated corporate name at 150 basis points over the bank bill swap rate (BBSW), when he can pick up an Australian major bank subordinated debt, rated five notches higher, at 180 bps over BBSW?” said NAB’s Garrick.

Analysts don’t expect the situation to change any time soon.

“I don’t expect any corporate bond issuance in Australia in the near-to-medium term, including 2009,” said Craig Saalmann, credit strategist at JPMorgan, citing the pricing difference as one of the reasons.

For banks, cheap lending is offset by other services offered to the same corporate client such as foreign exchange and swaps.

Most banks in Australia have kept the tap open to their core corporate clients but are lending with more scrutiny since the credit crisis began. That has led to smaller commitments from banks participating in syndicated loans.

Australian firms are also tapping the U.S. private placement market, particularly to borrow five-year money or longer.

Seven Australian firms, including engineering firms United Group Ltd <UGL.AX> and WorleyParsons Ltd <WOR.AX>, and building materials maker Boral Ltd <BLD.AX> have sold bonds in the private placement market this year, raising $1.6 billion.

Typical buyers of these notes are U.S. insurance companies keen on long-dated paper to match their liabilities.

Still, analysts warn a healthy domestic corporate bond market is essential to overall competition in debt markets.

“Banks and corporations have a symbiotic relation,” said Paul Dowling, principal analyst at research firm East & Partners.

“A healthy bond market makes for, generally speaking, lower cost bank funding, which in turn enables the banks to grow their lending book, which enables the corporates to grow.”

Source: http://www.afxnews.com

Related Content