Demand for re-financing builds

Monday, 31 January 2011 — Competition for capital is set to get hotter with a “wave” of re-financing due in the next 12-18 months, says Ernst & Young’s debt advisory leader, Paul Clark.

“Businesses that are better positioned in the eyes of the banks are going to have a significant competitive advantage – they will have better access to more debt at relatively lower prices,” says Clark.

A recent survey¹ by Ernst & Young found 34% of Australian companies need to re-finance in the next 12 months, while 48% need to re-finance loan or debt obligations in the next four years.

“We have moved more and more to short term funding since the financial crisis, in response to the higher costs of longer term funding – this is why we’ve seen larger corporates tapping into overseas bond markets and the United States Private Placement market to access cheaper longer term funding,” says Clark.

“However this is really only an option for big end of town and what we are now going to see is a relentless wave of demand for re-financing over the next few years, at a time when access to capital remains tight.”

“There will be more companies competing for a smaller pool of funding over the next few years. Many companies still have deals funded in 2008 at lower margins and these will mature in 2011-2012.”

Re-building following the Queensland floods will also add to demand for capital. Clark says while insurance will cover a significant proportion for businesses impacted, the interim loss of income and the sheer number of businesses needing to effectively start from scratch will inevitably mean more demand for capital.

Clark says businesses need to go beyond tactical working capital improvements in order to best position themselves with the banks.

“It is now about better procurement, getting out of non-core businesses, and re-negotiating facilities with your bank to reduce interest costs,” he says.

“Businesses need to identify the areas their banks might be concerned about and demonstrate what they are doing to minimise the risks. They really need to make sure the banks understand their business and that they keep them informed.”

Clark says the banks will continue to fund good businesses where they understand their strategy.

“There is a real flight to quality by the banks. Banks will compete for those businesses that can demonstrate a proven trading performance, strong risk management, a strong management team and sustainable, competitive advantage, he says.

“We’ve been involved with many clients that have been able to show this and what it means is access to larger amounts of money at cheaper rates.”

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