APRA’s wide net: corporate lending feeling the squeeze

Given the recent tightening of the major banks on corporate lending, the only alternative for borrowers is to turn to second tier lenders. 

There has been a lot of noise recently about credit tightening in the residential market as a result of the ever-changing landscape of bank lending policy and what will happen to the “property bubble”. However, the fallout is not limited to just property investors – the corporate lending market will also soon be feeling the squeeze as the Australian Prudential Regulation Authority casts a wide net in enforcing tough new rules.

Top-tier banks are now demanding more onerous reporting of earnings before interest, tax, depreciation and amortization (EBITDA) from business owners applying for loans, along with enforcing greater income to loan ratios based off these EBITDA guidelines. They are also demanding stronger tangible asset balance sheets, longer trading histories and greater cash trading surpluses.

New restrictions particularly affect businesses wanting sub $30 million loans, where there were already only a handful of major bank players. This has effectively paved the way for a ‘one horse race’, where lenders can reject or accept applications from stable businesses due to their appetite for that deal at that time.

In this environment, it’s dangerous for any borrower to rely on top-tier funding. Major banks themselves are imposing strict loan terms not only on corporate lending, but also on business property lending. 

The CBA in particular has adopted a practice of demanding quarterly or even monthly reporting to track debt to income ratios as a loan condition. If the ratios are not met, the Bank still has the power to default, regardless of whether loan repayments are being made

A majority of borrowers are not meeting these stricter conditions and are being left with very few financing options. As a result, many proven but junior asset backed borrowers with strong business models are being forced to look to second-tier lenders, where loan conditions are heavily skewed towards higher income levels above higher interest rates.

Effective rates with these second-tier lenders (including application and ongoing management fees) end up being higher than those for personal credit cards. Essentially, missing out on loans from top-tier banks means a rise in the effective cost of capital from around 5.5 per cent to 20 per cent.

Given the recent tightening of the major banks on corporate lending, the only alternative for borrowers is to turn to second tier lenders. 

The flow on effect from this will be a burgeoning second-tier loan market where private equity takes on what has traditionally been the small-to-medium enterprise banking space.

Unfortunately, things are going to get a lot worse before they get better. It is up to the government to level out the market by increasing competition in this vacuum between top banks and second-tier lenders.

Government reform should include policy changes and funding to allow licensed professionals to access this market to compete with second-tier lenders. Otherwise, financiers in the second-tier will monopolise the market, with greater opportunity to manipulate term sheets so that they give rise to technical events of default.

The long term effects could be destabilising for a huge part of the business sector unless the government steps in to offer new and practical options for corporate lending and business property lending.

Time For A Shake Up Of Australia’s Digital Intelligence Landscape

Israeli Prime Minister Netanyahu’s recent visit to Australia prompted Prime Minister Turnbull to reignite discussions around the importance of technology, science and investment. In his address at a luncheon recently held in honour of Netanyahu, Turnbull more specifically reiterated their joint commitment to:

“deliver the resilience and integrity of all the digital platforms on which our 21st century economies are built.”

The Government is right to focus on fostering an environment for better digital intelligence but the real challenge is paving the way for Australia to become a place where people want to own and retain intellectual property, not take it overseas.

Whilst Australia has a mature and desirable market, we still have a way to go in creating a digital intelligence environment conducive to strong capital growth.

Other countries cannot be criticised for having better ways of preserving capital. Experts and digital labor will continue to follow this capital abroad unless significant changes are made here in Australia.

Any government-backed programme to retain smart businesses in Australia, needs to be coupled with a new wave of tax reforms that encourage the creation and retention of intellectual property.

Governments around the world are trying to navigate taxing intellectual property in a borderless environment and there is tough competition between countries.

Home grown intellectual property should be encouraged to remain in Australia. Tax reform is a necessary tool when other countries are desperately trying to attract great ideas using concessional taxation of intellectual property. The people that have conceived those ideas will surely follow.

The Australian government’s $11.2 million initiative to establish “Landing Pads” in Berlin, San Francisco, Shanghai, Singapore and Tel Aviv, was designed to provide market-ready startups with a 90 day operational base located in one of the five global innovation hotspots.

While such an initiative could equip start-ups with the necessary tools to get their foot in the door, it also raises issues of integrity and security of that intellectual property and whether sufficient protocols and measures are in place to ensure that it can be both commercialised and safeguarded abroad.

The state and federal governments should place greater importance on implementing long-term initiatives that dovetail with models of proven initiatives at a local level.

For example, Brisbane is leading the way in terms of creating a prosperous local environment for digital businesses to form.

Brisbane was only the second city in the world to appoint a Chief Digital Officer who worked with the business community to form a digital first strategy which aims to drive digital uptake and use in Brisbane.

Critical ingredients to the success of these up and coming business hubs are international transport links, high quality internet services and simple and easy work environments.

Start-ups would also benefit from having access to the distribution platforms of established players. If the federal government were to support larger digital businesses with distribution by encouraging them to keep their IP here, these larger businesses would be better placed to support the startup economy.

It’s time that the industry has a shake up and Australia should be looking at ways to keep the digital sphere close to home.

An IP style hub located in regional Western Australia, for example, could provide a gateway to strengthening Australian-Asian ties while also compensating for our deteriorating mining industry.

Business development, skills and information sharing are all key drivers in industry growth and it’s time that we focus on supporting and driving these elements within our own country to bolster businesses, big and small. More importantly, it’s imperative that local, state and federal initiatives are coordinated to ensure Australia’s best and brightest ideas are not lured away from our digital sphere when they are on the brink of commercialisation.