Filling the gap: the emerging Australian private debt market
The recent purchase by Westpac of the remaining Australian operations of the Lloyds Banking Group for $1.45bn is the latest chapter in the consolidation of banks in this country1. As the pool of traditional lenders becomes smaller and more restrictive - what can corporates planning to secure funding to support acquisitions, capital expenditure and expedite organic growth plans look out for as an alternative funding option to the big four?
- State of play
- Enter the emerging Australian private debt market
- Implications for corporate borrowers
State of play
Since 2008, the Australian banking sector has seen a number of offshore players pull back from Australian lending, as well as smaller regional players being purchased by large Australian banks. The resultant consolidation has led to a shift in the balance of power, with the four major banks in Australia now holding a market share in business lending of over 75%2.
Sebastian Paphitis from our Capital and Debt Advisory team comments:
“Securing access to flexible and cost effective funding is a key issue for emerging Australian businesses, and at present they are telling us that this is a major roadblock for them.”
In addition to fewer potential providers of funding, the credit appetite of the banking market in the last 12 months has become more constrained. We are seeing an increased number of debt transactions not being progressed as they don't exactly fit the bank's risk parameters; and even others that are being approved are seeing tighter terms and conditions.
Enter the emerging Australian private debt market
In response to the ever-restricted pool of lending options available to Australian corporates - a whole new generation of private funding sources has emerged in Australia.
We estimate that over AU$9bn3 has been invested in senior loans by institutional investors in Australia in recent years. This figure excludes a wide range of asset-backed funders, investment banks, credit funds and non-bank financiers who are also active in the market. These parties utilise their own balance sheets, or pool of money from their investors including superannuation funds, high net-worth individuals, investment syndicates and insurance companies; and then place the debt into approved investments based on an agreed mandate.
Larger investors such as Industry Funds Management and Challenger have also become well known in the market place and are increasingly making a more meaningful contribution on debt transactions.
Other investors are much smaller, more nimble and are now entering the market seeking to find the right type of borrower to match their investment profile. These investors are generally staffed by industry experts, experienced bankers or fund managers, and have a more flexible approach to providing debt capital. In the current low interest-rate environment, they are looking for a greater yield than available in the bond markets, and so have turned their attention to the private debt market and the enhanced yield on offer. They have also looked to offer a more flexible funding structure to provide an alternative to the more constrained appetite in the bank market.
The following recent transactions highlight this trend of corporates increasingly tapping into private debt investors and alternative debt solutions:
- AU$300m Genesis Care 5 year refinancing, which included new lenders such as Babson Capital, Challenger, ICG, Macquarie and Siemens.
- Westbourne Capital’s recent participations in the £500m refinancing of Heathrow Airport and the AU$1.2bn refinancing of ConnectEast.
- FIIG Securities placement of AU$60m in unsecured wholesale notes for Cash Converters and similar AU$70m placement for G8 Education.
Implications for corporate borrowers
Instead of only considering Australian major banks and the more traditional public bond markets for debt funding, Australian corporates can also now consider the private debt market when looking to raise debt capital to support their capital agenda.
Not only do these private debt providers offer a diversification opportunity, in some cases they may also provide the ability to look at transactions beyond the parameters of the major banks. In the current low-interest rate environment, these alternate funding sources may provide a competitively priced source of capital in support of your capital agenda.
Organisations that adapt and successfully execute a capital management plan often find that they secure the required capital funding and also push boundaries in relation to the range of markets they can access and the innovative solutions they are able to explore. This can enable them to raise funding to support acquisitions, capital expenditure and expedite organic growth plans that did not previously seem possible.
The Capital & Debt Advisory team at EY is in continuous dialogue across the entire spectrum of private debt investors. Through their extensive experience across a range of funding transactions, the team are able to assist in matching the right investor to suit your funding strategy and requirements.
Questions to ask yourself:
- Do you have visibility of your balance sheet’s capabilities in its current form and an agreed Capital Agenda?
- Are there the appropriate funding solutions in place to support your Capital Agenda?
- Have you assessed all funding options available in the market to ensure that your arrangements support optimal growth? The Australian private debt market is an important market to consider if you are looking to strengthen access to funding and foster innovative solutions to growth.
1 Westpac to acquire select businesses of Lloyds Banking Group Australia, 11 October, 2013: http://www.westpac.com.au/about-westpac/media/media-releases/2013/11-october
2 APRA ‘Insight Issue Two 2013
3 EY Analysis