Major banks look to offload business loans as conditions worsen
Deteriorating business conditions is setting off a wave of major banks looking to offload loans with underperforming businesses, a non-bank corporate lender warns.
The share of business loans to companies facing financial stress is seeing a steady increase as borrowing costs rise and inflation continues to put pressure on the net profit lines, according to Epsilon Direct Lending founding partner Joe Millward.
The non-bank corporate lender said while it doesn’t participate directly in the distressed business lending market, the lender is now seeing a greater number of loans that it evaluates as being to companies in some form of stress or distress.
“What we’re also seeing is borrowing requests from the large advisers such as the debt advisory divisions of the big four accountancy groups seeking financing for, on the face of it, very strong, mature corporates that are currently looked after by one of the major banks, presented as an opportunity to displace the major bank,” said Mr Millward.
“However, once you scratch beneath the surface, you find out that their loans are due in the next year, and they’re actually underperforming a bit.
“So what we think we’re seeing is the start of a wave of the major banks looking to exit relationships with borrowers they’re concerned about by asking those borrowers to go and talk to a debt adviser to find a loan somewhere else.”
Mr Millward said this is a polite way for the banks to agitate for an exit from these businesses.
“Epsilon is focused on outperforming growth companies so we tend to decline those lending opportunities,” he said.
Banks more reluctant to lend to new customers
Lenders across the board are becoming more cautious at the moment as borrowing costs increase and other headwinds, such as inflation, impact businesses.
“The cost of borrowing has generally gone up in line with the the RBA rates. When rates increase, consumers have less money to spend and so everyone’s a little bit more mindful of what’s out there in the economy,” said Mr Millward.
In this kind of environment, banks are more focused on existing customers and looking after their needs rather than taking on new companies they’ve never worked with.
“It’s a lot harder to get your head around a business that you’ve never worked with before and the risks are more unknown,” he said.
“We found in the last six months that we’ve had a lot more inbound inquiries from very strong, high-quality companies – cash generative, profitable businesses that want to borrow from a variety of purposes where the banks are just knocking them back.
“Traditionally, banks would have jumped at the chance to look after those types of borrowers. So there’s definitely a risk of mindset within banks for dealing with new companies.”
The non-bank lender said there continues to be a large number of great businesses borrowing from banks, but the rate of rejection is increasing.
Accountants and businesses should be “planning for the worst and hoping for the best” in the current climate, he said.
“If you’re borrowing for the next three years, either hedge that interest rate out into the second of the year, to make sure you know what your borrowing costs are or so you can remove the market risk, or make sure that you can afford to pay at least another 3 to 4 per cent of interest costs for that period,” said Mr Millward.
“We just assume that the base rate is going to go up by another 3 or 4 per cent. You’d never find an economist that would say that, but if you go back two years, you wouldn’t find any economists saying that the base rate would get to 5 per cent for the next two years either.”
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