The banks may have overplayed their hands
The global financial crisis has led to our banks tightening their underwriting standards, raising loan margins, reducing exposures and exiting others. At the same time, increased emphasis has been placed on increasing capital, which is the other side of decreasing lending.
All this has sent a clear signal to borrowers: look elsewhere.
The banks have raised billions of dollars under a Commonwealth government guarantee, since the guarantee became available in December. And while the big four banks are all 70 per cent or more through their bond issuance programs for fiscal 2009, they may find that they are not going to need as much debt funding as they had thought.
The legislation for the creation of the Australian Business Investment Partnership, or RuddBank as it has become affectionately known, was released last week.
The legislation revealed that RuddBank's mandate will extend beyond taking the place of exiting foreign banks in commercial property deals, to replacing foreign banks in any commercial lending arrangements and replacing the local banks too, if they want to exit.
In addition, public-private partnerships are stalling across the country because the banks don't want to take on exposure to long-term infrastructure.
The Liberal opposition fears that Ruddbank will enter this sector too, propping up state governments as it does so.
But if the banks do not want to undertake commercial lending, who needs them?
Standard & Poor's released a report on Monday entitled "Australia's Corporate Bond Market: The Time May Be Right For Its Resurgence". The report argues that conditions are the most conducive in years for the resurgence of the domestic corporate bond market.
The banking system's limited capacity to provide funds for corporations to meet their debt refinancing tasks and capital expenditure commitments, combined with investors flush with cash and looking for better yielding investments to equity markets and term deposits, may spur many of Australia's largest companies to access competitive long-term funding through local bond issues.
The report also considers the role that retail investors may play in this process. S&P notes that the AMP Note issue, aimed at retail investors, may be a portent of things to come.
The 1987 stock-market crash led to the development of a relatively strong retail bond market as steep losses from equities lured investors to the relative safety of fixed-income products.
The author of the report, Anthony Flintoff, separately advised that S&P has seen a material increase in inquiries from companies, most likely to be in the BBB or BB rating categories, about obtaining a credit rating.
Flintoff said: "These companies are pro-actively looking at alternatives for raising debt, with the Asian market, US private placements, and the domestic corporate bond market all under consideration."
If the banks ultimately feel left out, if not left behind, perhaps they can lend to the state governments that can't compete against the banks' government-guaranteed bonds. States like Tasmania and Queensland come to mind, and perhaps soon Western Australia. Then of course, there are always the local councils that Queensland Treasury Corp says it can no longer fund.