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The debt funding outlook for 2025 is dominated by uncertainty about interest rates, a domestic recession and global trade policies. There will be trade-offs between taking advantage of cheaper cash and deleveraging in the face of a volatile economic outlook.
Interest rates
February's 50 basis point cut to the Official Cash Rate (OCR), after two 50-point cuts in the last quarter of last year, was widely expected but opinions vary on future cuts. Some are calling for 3% by year-end, while others expect a temporary halt at 3.5%. We sit somewhere in between, expecting most of the movement to occur in the first half of the year.
The OCR is expected to stabilize at around 3%, higher than pre-pandemic. Whether that happens this year or next, it may disappoint some borrowers. The trend for longer-term money, which is more dependent on global factors, looks less certain.
Recession
The 2.1% drop in Gross Domestic Product in the last half of 2024 delivered a recession that was deeper than we foreshadowed in our predictive publication. There were 2,500 company liquidations and 186 company receiverships. These numbers are the highest since 2015 and 2012 respectively but are still below those delivered by the Global Financial Crisis.
Things may be looking up, but some growth forecasts seem overly optimistic. We expect that the full benefits of recovery are unlikely to be felt until 2026. Inflation may be tamed, but economic conditions might still affect earnings for those dependent on household and/or government demand.
Even with a drop in interest expenses, we expect compliance with financial covenants to curb new borrowing. It might be time for some borrowers to consider whether their current covenant calculations are still working for them.
Borrowers in vulnerable sectors like retail, hospitality and construction with strong debt appetites might also want to consider diversifying their funding sources. Lenders can grow cold on a whole sector if they get burnt in an insolvency scenario.
We’ve seen increased creativity in insolvency and restructuring transactions, particularly in the US. Borrowers are using loopholes in their loan documentation to restructure their balance sheets. This can take the form of asset dropdowns (where an asset is transferred out of the lender’s security pool and used to secure new debt) or ‘up-tiers’ (where new debt is raised that outranks existing debt creating an opportunity for some lenders to transfer to the higher position leaving the rest subordinated).
While these moves have yet to be seen in New Zealand, local lenders are starting to require clauses preventing such restructures (known as “J.Crew”, “Serta” and “Anti-Chewy” clauses).
Early discussions with your lenders remain the best way to deal with distress.
Debt Capital Markets
We expect another mixed year for the New Zealand Debt Capital Markets. The fourth quarter last year saw some momentum start to build, with issuers returning to market after a slow middle of the year. Continued falling rates and ongoing redemptions will also incentivise investors to lock in relatively higher rates while they can, particularly in higher yielding products.
Supply of corporate issuance could be somewhat dampened due to a maturity/rollover ‘gap’ that marks five years since the initial Covid-related lockdowns and market uncertainty. As five years is a preferred tenor for corporate issuance, the value of those instruments maturing this year will be lower than usual.
Government bond issuance is expected to remain elevated in the medium term, and the Australian market remains an attractive option for rated issuers – potentially limiting both supply and demand for non-government highly rated issuance in New Zealand over the year.
Sustainable lending
Despite increasing harmonisation of sustainability linked loan products based on the APLMA Principles and broad implementation of sustainability frameworks and lending in the large corporate space, uptake among mid-market borrowers outside of new standardised bank green loan products has been small - largely due to the costs involved.
We’re not expecting much of an improvement this year in the face of an international kickback against sustainability programmes. Our pick as potential bright spots are loans to finance discrete green and low carbon assets and – at the institutional level - sustainable syndicated facilities and common terms transactions.
Private Credit
Private credit is expected to continue its rise, particularly in sectors where banks have derisked. We’ve discussed the state of the New Zealand private credit market in more detail here. We’ll be looking to see what impact declining yields may have, particularly on whether offshore private credit funds expand their lending in the New Zealand market.
The Australian private credit boom has drawn the attention of the Australian Securities and Investments Commission (ASIC), the Australian Prudential Regulatory Authority and the Reserve Bank of Australia. A task force commissioned by ASIC published its discussion paper on Wednesday, with a focus on risks to retail investors and market integrity. It’s open to feedback until 28 April 2025.
In recent times, the Australian market has seen some signs of strain on private credit providers, particularly in the commercial property sector, which may affect their appetite for expansion.
However, while more regulation seems likely, we don’t expect that it will be a priority for Government or regulators this year.
M&A
The drivers for M&A remain mixed for 2025. While interest rates are heading down and financial sponsors are looking for deals, the real economy remains tight, the tariff threat persists and many corporates are focusing on organic rather than acquisition opportunities. Locally, the Government is focused on a growth strategy and is seeking to attract inbound investment, which could help off-set global geopolitical risk.
Government action
The Government has an ambitious policy work programme for 2025 (see our overview here).
The agenda includes a renewed focus on public-private partnerships. Risk allocation and certainty of return will continue to be critical for both consortia and funders.
The funding and financing framework provides some insight into the Government’s thinking on when and how it will contribute funding and/or financing to new and existing assets or services. The infrastructure pipeline provides a useful investment context. However, the fiscal constraints on the Government will force it to hold its own purse strings rather tightly and likely lead to the prioritisation of certain projects over others.
Capital markets reforms may enable KiwiSaver providers to increase investments in private assets, presenting new financing avenues for unlisted entities.
Global trade policy
Geopolitical unpredictability remains a constant, with increased tariffs posing risks to global trade and supply chains. Such developments could complicate the Reserve Bank of New Zealand's path to neutral interest rates. Treasury teams may wish to reassess hedging strategies in light of this risk.
Conclusion
Navigating the debt financing landscape in 2025 will require strategic foresight and adaptability – but things do look better for 2026.
Thank you to Hayden Reyngoud for his work preparing this publication.
