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A new twist in debt capital markets

A new twist in debt capital markets

Bond markets have been the mainstay of unsecured long-dated debt finance for some time but counter-intuitively the bank loan market may be in for a renaissance.

Maturity transformation - turning illiquid long-term assets into liquid short-term assets - is one of the banking system’s most important functions. In an address to the 2015 Thomson Reuters' 3rd Australian Regulatory Summit, then Deputy Governor of the Reserve Bank of Australia (RBA), Philip Lowe, now Governor of the RBA, said: “Without such transformation, it is difficult to see how modern economies would work. This transformation has been critical to the accumulation of physical capital in our societies as well as the operation of our modern payment systems.”

However, the raft of regulatory reform that has swept the banking industry in the past decade has curtailed banks’ appetite to offer loans with tenor beyond seven years. Even loans for between five- and seven-years have become a grey area for many banks. That has led banks to routinely take institutional clients needing very long-dated debt finance to the bond markets. The US private placement market, in particular, has become the preferred market for these borrowers.

Two Australian pioneering borrowers

Now though we are seeing the bank loan market emerge as an alternative source of long-dated debt for institutional investors in Australia and elsewhere around the world, including the UK and USA.

National Storage is one Australian example. It is one of the largest providers of self-storage facilities in Australia and New Zealand. It listed on the Australian Securities Exchange in December 2013 to form the National Storage REIT.

We were one of three major Australian banks that participated in an A$380 million club loan in mid- 2016 to provide National Storage with three-, five- and seven-year debt. What distinguished the syndicate was the presence of Australia’s largest superannuation fund, AustralianSuper. It manages over $103bn in assets for its more than 2.1m members.

The not-for-profit pension fund extended eight- and 10-year finance from the same platform with identical terms and conditions. The only difference was a slightly higher margin reflecting the longer tenor.

Another Australian company that tapped into superannuation funds’ appetite for long-term debt is Visy Industries. The unlisted company is one of the world’s leading packaging, paper and recycling companies. In March, Visy raised $150m of 10-year debt from AustralianSuper and global investment giant IFM Investors.

More deals ahead

Our conversations with Australian and offshore pension funds tell us that many are interested in lending directly to institutions. In bypassing more traditional public capital markets, direct lending participants are likely to increase their visibility to the pipeline of potential transactions. Similarly, borrowers are likely to benefit from the added flexibility of direct negotiations with their end investor base.

We continue to talk to financial sponsors on transaction opportunities as well as to our broad spectrum of institutional investors, including pension funds and global insurers, to understand their investment needs, the tenors, types of credits and other parameters they prefer.

To drive momentum in direct placements of non-public debt and capital products to investors we have established a new global team. 

It will leverage our existing set of investor relationships and establish new client relationships to generate a trusted portfolio of domestic and international funds. This will provide our borrower clients with a differentiated and more compelling source of capital.

We will keep you updated as we continue to analyse broader global trends in this area and complete further transactions.

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