The credit crunch is likely to get worse before it gets better for Australian companies, as foreign lenders retreat and Australian banks keep tighter control over who they lend to.
Australia's top banks are all gearing up to be able to shoulder a bigger lending burden, having raised about $14 billion in debt and equity over the past three months, seeing opportunities as foreign banks step back.
Australian and New Zealand companies have more than $24 billion of debt due in 2009, within the realm rated by Standard & Poor's, including global miner Rio Tinto, rated as a UK company. Rio Tinto, with $8.9 billion due, and coal-to-groceries conglomerate Wesfarmers, with A$3.5 billion due, make up about half the total refinancing need.
"Those refinancing pressures are building," said Anthony Flintoff, S&P's senior director of corporate ratings in Australia. The rating agency warns that while the need is not too large in 2009, the burden will be much bigger in 2010, as a lot of debt that was refinanced this year will come due, on top of leveraged buyout debt from three to six years ago coming due.
"You've got these coincident factors that are going to make that the really difficult year, if conditions remain as they are," said Flintoff.
Bank executives say depending on how sharply foreign lenders pull back, Australian banks will be hard-pressed to fill the breach, which would force more companies to raise equity, cut capital spending, or cut dividends. "We've seen more foreign banks withdrawing from business lending because foreign bank head offices dictate capital allocation," said Paul Dowling, principal analyst at Sydney-based banking research firm East & Partners.
"Domestic banks will not be able to take up that slack entirely," he said, adding that Australian banks are already under pressure to supply credit. The property sector and businesses exposed to discretionary consumer spending might be the most vulnerable. "Foreign banks have sizeable exposure to real estate and if they decided to pull back from that sector, it would be a challenge," said Joseph Healy, executive general manager for business and private banking at National Australia Bank.
In the retailing sector, Wesfarmers is considered to be facing the most pressure after buying Australia's second-largest supermarkets group Coles and retailers Target, K-Mart and Officeworks for A$19 billion at the top of the market last year. If it runs into problems refinancing its debt, it might have to cut capital spending, which would set back its turnaround plan for the Coles business and in turn clip earnings growth. It is also vulnerable as coal earnings are expected to slide in 2009.
The company has flagged it wants to tap the Eurobond market for up to 3 billion euros, but analysts say that's dicey. "The private placement market, the US bond market, Euro market - who knows which will be the first or the deepest to start to accommodate some of these companies?" said Flintoff.
In the property sector, groups with stronger balance sheets should be able to raise capital, but not the weaker trusts. "The property sector was one of the first sectors to feel the pull-back from foreign banks. The loan market has been dead for a long time. You can't get money. No one will lend," said Linda Laznik, treasurer at embattled real estate investment trust GPT Group.
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