How the banks will take their revenge on business in 2009: Kohler

Australian banks have issued about $40 billion worth of government-guaranteed, AAA-rated bonds in five weeks – two-thirds of the amount they raised from global markets in the whole of 2007.

Australian banks have issued about $40 billion worth of government-guaranteed, AAA-rated bonds in five weeks – two-thirds of the amount they raised from global markets in the whole of 2007.

It’s also 40% of their entire 2009 debt maturity needs.

While the share prices of US and European banks continue to crash as they fight for survival, the Australian banks are engaging in a once-in-a-lifetime dash for cash – wildly distorting the market in their favour thanks to the Rudd Government’s decision to guarantee their offshore debt raisings.

As a result the banks are mopping up all available cash at the expense of corporations. With so much AAA, sovereign-guaranteed bank paper available at quite healthy yields, the international credit market (such as it is) has little interest in the A+, A and A- paper being offered by Australia’s leading corporations, even at triple or quadruple the margin.

The banks are like kids let loose in a lolly shop – they are paying as little as 100 basis points over the bank bill swap rate (BBSW) and getting plenty of money at that price. (BBSW is Australia’s version of Libor, which stands for London interbank offered rate; yesterday it was set at 3.86%, 40 points below the RBA cash rate, in anticipation of a rate cut in February. Usually BBSW and cash are roughly the same.)

On top of that margin, the banks have to pay the Government 70 basis points for the guarantee, but it’s worth it. Oh yes, indeed.

They have a captive corporate market for the funds that produces a very handy interest margin to help make up for all the loan losses they are wearing from the past follies of now-departed hotshot credit marketers who they used to employ.

According to an ANZ presentation last month, Australian companies must replace $15 billion to $20 billion in syndicated debt in the next six months. For the whole of 2009, I have heard estimates of anything up to $90 billion as a result of credit boom conditions three years ago.

But the debt markets are closed to these corporates because the banks are crowding them out with a government-guaranteed monopoly.

They have to go to the banks for the money and, naturally, get screwed. They are being forced to pay margins over the banks’ cost of funds of up to 400 basis points, and the banks’ lending officers are shackling them with the most horrendous covenants and charges. No more “covenant lite” baby – it’s “covenant heavy” nowadays.

The good news is that the benchmark rate – BBSW – is collapsing with the cash rate, although not as much as Libor in the US and Europe. Currently below 4%, it was as high as 8% last year.

In the US, Libor was 5%, now 1.08%; in Europe it is 2.56%, and last night the European Central Bank cut the cash rate again, by 50 basis points.

So thanks to the global recession, blue-chip local companies can still borrow money at a rate of less than 10% and falling – it’s just that there is a long way between the official RBA rate and what they are paying, and when they go shopping for cash there are four stores in the mall: ANZ, Commonwealth, Westpac and NAB.

And the grinning shopkeepers standing out the front to welcome them all look exactly the same because they are wearing Kevin Rudd masks.

Did the Australian Government have to offer to guarantee the offshore debt raisings of local banks? Who knows, but it did it.

The result is that 2009 is the year of the banks’ revenge.

Bank corridors are echoing with the screams of corporate treasurers issuing from every meeting room, as they plead for refinancing or just to be allowed to survive.

And in every room there is a picture of Kevin Rudd plus an insolvency accountant wearing a black hood standing in the corner, waiting.

This article first appeared on Business Spectator