Weaker international banks create opportunities for private credit

A weaker global banking system is forcing businesses to seek credit elsewhere, which is creating opportunities for private credit internationally and in Australia, according to Mercer.

Mercer head of investment consulting for Asia Pacific Tony Cole said while Australian banks have proved to be comparatively resilient to the onslaught of the global financial crisis, large local firms also borrow internationally.

“There are fewer banks around globally than there used to be,” said Cole, adding that those banks are also constrained by higher debt to capital ratios. “The cure for the banks is to get their gearing down, and the only way to do that is to cut the level of lending.”

In the Australian context, Cole said that while some of the large local firms do borrow locally, they rely fairly heavily on international borrowing. The concern with this is that when these banks pull back and reduce their lending overall, they tend to give preference to their longstanding domestic clients.

Cole said that because many companies can no longer access credit through the banks they have to look for it elsewhere, resulting in some big names — such as AMP and Lend Lease — raising finance directly in the marketplace rather than through the banks.

“If it’s hard for them, it’s even harder again for more risky development projects and the small to medium enterprise (SME) businesses.”

Cole said that while the large companies can access credit more easily directly from super funds or large investment managers, it’s much more difficult for SMEs. This has led to the emergence of new private credit institutions.

“There’s a fund called Causeway, which was established to provide credit to SMEs,” said Cole, adding that they are already raising a second fund, and while the amount of money is modest at $300 million, they are making individual loans of up to $3 million.

“There is another one called Shearwater, which has been established partly using private equity finance,” he added, “but also raising finance from super funds and others to provide credit to people who used to get it from the banks and now can’t. And in the infrastructure space, a new fund manager has emerged called Westbourne, which is basically financing primary rollovers of existing debt or infrastructure investments. But they are also willing to finance new ventures.”

Cole said this trend is expected to continue in 2010 as capital adequacy in international banks remains constrained.