When you need to bank on your banker

Intheblack, Apr 2009 by Barned, Jan

Business funding: JAN BARNED WARNS THAT WITH EASY ACCESS TO FINANCE A THING OF THE PAST, BUSINESSES HAVE TO WORK A LOT HARDER WITH THEIR FINANCIAL INSTITUTION.

UNDER THE NEW MARKET CONDITIONS managing banking relationships is crucial as securing funding becomes tougher. The Reserve Bank of Australia February statement says: "As a result of the problems in global financial markets, it has become increasingly difficult for many firms to access finance." The ACCI-Westpac survey of industrial trends shows that the proportion of firms in the manufacturing sector reporting difficulties obtaining finance in the December quarter rose to its highest level in more than 30 years.

"An NAB survey also Indicates credit conditions tightened significantly in the December quarter, but suggests some improvement late in the quarter. The bank's business liaison has indicated that financing conditions were becoming more difficult through 2008 for companies across a wide range of industries, with a noticeable tightening in credit availability over recent months.

"Growth in total business debt - that is, intermediated business credit plus borrowing on the capital market - Is estimated to have slowed to an annualised rate of around 1 per cent over the December quarter, down from an annualised rate of 9 per cent over the September quarter. Private-sector surveys report that overall business conditions fell noticeably below average."

The message is similar overseas. With many offshore banks collapsing and others merging, there is a reducing pool of available funds. At a recent debt funding conference in Melbourne, the banks agreed that this was just the beginning. It was noted that for the Australian, US and European markets the appetite for risk has changed. With government guarantees in most global markets, investors are swarming for these and the rest of the markets are suffering. It is anticipated that these government guarantee products will dominate the US, European and Australian markets for some time to come.

With the flight to quality high on the agenda, debt capacity for business is squeezed. Before the financial crisis, most banks would look at 80:20 gearing but in most cases this has shifted to something lower like 60:40. With a move to a more conservative risk-averse stance, margins have increased exponentially in the past six months. In some instances, margins were quoted at the conference as having increased from 1.5 per cent to 7 per cent for large Australian companies. Most financiers believe that the full impact of the global economic crisis has not been factored into business results yet.

Due to such high margins obtainable in the primary market, in some capital markets the secondary market is effectively dead. What financial institutions usually do is take on capital market debt and trade out of it on the secondary market where margins were higher than the primary issue. However, with primary issues achieving such large margins Investors can buy "on market" rather than chase yield on the secondary market. This means that many banks cannot turn over their funding portfolio by trading out the debt on the secondary market and effectively release further capital for funding.

The other key issue for financial mar- kets is market capacity. Most banks only have a set amount of capital available to lend, which has not only been impacted by the closure of many secondary mar- kets but also falling capital base (revalu- ation) and the introduction of Basel II, which now requires banks to hold additional capital for undrawn facilities. This coupled with the fact that in the US, Europe and Australia most domestic financial institutions have turned parochial, choosing first to support their own before offshore entities, means that where offshore banks previously supported organisations, this funding simply may not be currently available.

Limited capital available will mean that most financial institutions will look at existing relationships before taking on new ones. In many cases, the relationship that businesses have had with their financial institution is also likely to have changed. Financiers will be looking for more information than before. The time to process requests will therefore take longer. If finance is needed, start early. Don't assume that finance will be available. The best advice might be - hope for the best, prepare for the worst. Consider approaching more than one financier to ensure a fall-back position is in place. Perhaps spread the requirements over more than one financier; this will reduce the risk where one bank may request early repayment - at least all the funding will not be withdrawn.

Make sure they are up to speed with industry trends and discuss key issues of the organisation to keep them fully informed. Information should be detailed and timely. Introduce key management to the relationship banker this will give them insight into the management team that is responsible for the business. With the financier in the driver's seat, business needs to take a flexible approach to financing. What has been on offer previously may now not be available. The best approach is to understand the new market, what the bank needs and be clear on the business requirements. The approach should be to match all three for a favourable outcome, and this may require being open to tighter conditions than in the past. Don't forget that ancillary business is usually important to the bank (such as transaction banking).