A more competitive debt market

17 April 2019

As little as ten years ago, most of New Zealand’s large corporates and institutions would have got most of their debt funding from the four Australian-owned banks.

Now, the picture is considerably more complex and sophisticated – and the drivers behind that change look set not only to continue but to gain momentum.​

Change drivers

The change is being driven by a range of factors – commercial and regulatory.

A more competitive banking sector

There has been an increase over the last five years in the number of Asian banks trading in New Zealand. They often have a lower cost of funds than the Australian banks, making them attractive to borrowers.

There was little understanding at first of their lending appetite and approval processes so it took them a while to establish a foothold here, but now they regularly form part of banking syndicates and are active in a broad range of bilateral facilities. They are also increasingly able to offer locally a range of trade and other debt products.

Uncertainty in the bank regulatory landscape

The regulatory landscape applying to banks is currently in a state of flux from the workings of the Hayne Report, the Financial Markets Authority/Reserve Bank conduct and culture findings, the possibility of a complete overhaul of the Reserve Bank of New Zealand Act and the RBNZ review of capital requirements. 

This uncertainty may make foreign banks reticent about establishing operations in New Zealand, creating opportunities for other offshore institutions to distant lend into the New Zealand market.

An influx of offshore credit funds

Offshore credit funds are establishing in New Zealand, the latest addition being Tanarra Credit Partners. Other funds are lending here through their Australian or Asian branches. 

They tend to specialise in acquisition, real estate and infrastructure funding and can offer terms, pricing and tenor which are difficult for the other banks to match. In Australia, they have been particularly active in unitranche (a hybrid loan structure combining senior and subordinated debt into one amount with a blended interest rate) and term loan B facilities. There have been very few of these structures in NZ, but we think that will change in the near term.

Offshore-driven M&A

Even from outside New Zealand, credit funds have increasing opportunities to lend against New Zealand assets. Bidders into many New Zealand acquisition opportunities are based offshore, particularly Australia, but are familiar with the credit funds, and often have existing borrowing relationships with them. It is an easy step to ask their existing lenders to participate in funding NZ-based acquisitions.

A desire to shop around

Corporate borrowers have become nervous about their reliance on the ‘Big Four’ banks as their sole or principal source of funding. This began as a reaction to a tightening in bank lending in 2017 and has intensified as a result of the current Reserve Bank of New Zealand capital review and its implications for bank lending appetite and competitive pricing.

The rising appeal of the bond market

The Quoted Financial Product (QFP) regime has considerably reduced the time, cost and complexity of issuing bonds, making the debt capital markets much more attractive to corporate issuers. The recent change in regulatory approach by the Financial Markets Authority (FMA) toward green bonds will also make this a more popular and accessible funding mechanism.

Increased US private placement activity

As more New Zealand companies have used US private placements (USPPs) as a funding source, these investors have become more familiar with the New Zealand market and more willing to invest here, leading to a spike in activity. As with the offshore credit funds, USPPs can usually offer more favourable terms than the mainstream banks.

Implications for New Zealand

Greater choice of funding options in a more competitive market has to be a good thing. Yes, many of these funding sources are offshore but that has been the reality in New Zealand for almost all of our short history.

But there are specific implications for both borrowers and banks.

Banks will need to think about how they can compete in this new environment and what their role will be. Their capital structure and the regulation they are subject to will make it difficult for them to compete in some areas but, as full service local banks with broad relationships, there will be opportunities for them to partner with offshore funders in a variety of ways.

Borrowers will need to weigh their options carefully. Many finance documents provide that decisions are made by a majority of creditors which, traditionally, was always the banks – with whom borrowers would have a strong relationship. As that changes, so will the dynamic for both borrowers and lenders. These considerations can be particularly important for borrowers in challenging economic times. 

Dealing with USPP investors, bond holders and credit funds in these circumstances is likely to cost more and they may be less flexible in their approach. The Australian banks which operate in New Zealand have always been conscious of their social licence – as was evident in their support for dairy farmers when the dairy pay-out was reduced. 

Offshore lenders are unlikely to feel constrained in the same way. 

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