Banks are ready to start writing government-guaranteed loans for businesses affected by COVID-19.
The Government on March 20 announced it had agreed to underwrite 80% of individual bank loans to eligible firms.
This means that in the event of a default, 80% of the loss will be borne by the Government/taxpayers and 20% by the bank.
The Government is taking on the bulk of the credit risk to encourage banks to keep lending.
While loans will be written according to banks’ lending criteria, Finance Minister Grant Robertson said the risk-sharing arrangement “implies a higher tolerance of risk than you might normally see from the banks, because obviously we’re in a time when their normal risk weightings probably aren’t appropriate”.
The total value of loans the “Business Finance Guarantee Scheme” will cover is $6.25 billion.
Eligibility
To be eligible, businesses must be New Zealand-based and have had turnovers of between $250,000 and $80 million at the end of the 2019 financial year.
The loan can only be used to meet urgent liquidity or bridging financing needs due to COVID-19 disruption.
Loan proceeds can't be used to cover capital assets/projects, distribution of dividends, on-lending outside the borrower's group, or to refinance existing debt unless it was advanced on or after March 16, 2020.
The maximum amount banks can lend to each business under the scheme is $500,000.
The maximum term for each loan is three years. Different banks will have different rules regarding terms.
The scheme only covers new lending.
Property development, property investment and agriculture are among the businesses excluded.
Borrowers can only take out a loan under the scheme if they've used their bank's existing facilities (other than credit cards, trade finance and other types of finance specified by banks).
Participating banks include ANZ, ASB, BNZ, Heartland Bank, HSBC, Kiwibank, SBS Bank, TSB and Westpac.
'Tough conversations' ahead
New Zealand Bankers' Association CEO Roger Beaumont said banks' credit assessments typically take 10 working days.
ANZ's Mark Hiddleston said: “To make the assessments quicker we ask that when we have those conversations with customers they come with a plan or some thinking about how they intend to last the crisis and get the business back on its feet afterwards.”
Westpac's Simon Power said: “As with any business lending, we still need to understand if each customer will be able to meet their commitments. We don’t want to place people under even more financial stress by lending to customers that don’t have a viable way forward.”
ASB's Vittoria Shortt made a similar point, adding: "There will be some tough conversations ahead but that is our job as responsible lenders."
Kiwibank's Steve Jurkovich said: “My message to businesses is talk to us early. Even if you think you’ve got sufficient cash flow to see you through the initial shock of Covid-19, the financial impacts could be felt for much longer, and we are committed to doing what we can to help you get through this.”
See this page for more info.
Here are the scheme's rules, as summarised by ANZ:
Your business
- Had turnover of between NZD 250,000 and NZD 80,000,0000 at the end of its 2019 financial year.
- Is a New Zealand-based business (the Government may define this – please contact us if you’re unsure whether this applies to you).
- Isn’t engaged, as material part of its business, in an excluded activity (see below).
- In assessing the lending, ANZ will need to look at the impact of COVID-19 on your business operations, its trading position before the COVID-19 crisis and your plan for when the country returns to something resembling normality.
The loan
- Can only be used to meet urgent liquidity or bridging financing needs due to disruption COVID-19 has caused your business and not for any excluded purpose (see below).
- Cannot be drawn or accessed before using any existing ANZ facilities (other than a credit card, trade finance loan, or other loan that we let you know is excluded).
Excluded activity means one or more of the following:
- Property development and property investment
- Being a local authority, a council-controlled organisation or a council organisation for the purposes of the Local Government Act 2002
- Manufacturing or testing cluster munitions, anti-personnel mines, or nuclear explosive devices (NEDs)
- Manufacturing tobacco
- Processing whale meat
- Manufacturing recreational cannabis
- Manufacturing civilian automatic and semi-automatic firearms, magazines, or parts
- Agriculture (which doesn’t include horticulture, viticulture, aquaculture, or services to agriculture)
- Any other activity the Crown notifies to ANZ
Excluded purpose means one or more of the following:
- Capital assets or projects, other than business as usual expenditure which does not exceed 5% of the principal amount of the supported loan.
- Dividends to be distributed outside the applicant’s guaranteeing group.
- On-lending outside the applicant’s guaranteeing group.
- Refinance of an existing loan or facility with ANZ or another organisation (unless we agree in writing).
- Any purpose related to an excluded activity.
35 Comments
Bro, it's a f*****g pandemic. This facility is designed to provide working capital to viable businesses to help get them get through this mess.
They employ 10's of thousands of New Zealanders, who all pay tax and contribute to society. The Government has forced many businesses to close.
Banks are assessing credit through their normal criteria.
What sort of future do you want?
"Why would you bother being a prudent business owner with some rainy day funds?" Perhaps, in the dozens of other scenario's where sh*t happens, your business is impacted negatively and the government won't bail you out. Sickness, poor investment choices, staff disputes, change in industry structures, regulatory changes, interest rate/cost of borrowing increases and so on.
Let's try and look on the bright side of this.
Regardless of the situation of a firm before Covid19 hit, this is an unexpected situation - a Black Swan if you like.
Banks won't want to "do 20% of their dough" even if it's 'just 20%,' so they will be cautious.
Someone; something had to start the ball rolling to unblock the credit pipeline for those trapped by the unexpected, and good on the Government for being courageous. The banks are, rightly, frightened in a commercial sense. The most uncertain of times are ahead of them.
The worst thing that can happen is "It didn't work! What a waste of money" the best thing is.. it works.
(NB: My core view remains. This...is the start of Nationalisation. Forget the stigma attached to the name, it's going to be necessary. The firms that fail that have an irreplaceable national significance - eg; Air NZ, The Banks, will be taken onto the Public Balance sheet to keep them going. But 'things' are going to get a lot worse before that happens. It will.)
If banks are to continue lending, after all it is a core business activity, this sort of presents the case for property doesn't it?
Makes for an interesting situation and quandary for the Government. The impacts of this crisis could see a lot of people not able to meet their mortgage payments, and those flush, rubbing their hands in glee at the likely consequences, and this costing the Government a hell of a lot more. Some regulation required?
As far as I can tell my crypto investing qualifies under this scheme. "This means that in the event of a default, 80% of the loss will be borne by the Government/taxpayers and 20% by the bank." Excellent. $500k you say? Off to Bitmex with x10 leverage.
Now you may laugh, but there will be more ridiculous examples than that in the future.
I would say the banks will be very tough on who gets it as they still risk 20 percent and it is more government PR stunt to say we are helping business when they know the banks will be ruthless on approving loans and only a handful will get approved.
How does a small business prove how they will repay when we are heading into a possible depression.
What will be the collateral security for the 20% of the Bank's share of these loans ? Will the banks have recourse to the assets of the borrowers already mortgaged to them for other existing facilities ? If the 20% is not repaid, can the banks enforce insolvency/bankruptcy ? Personal libility of owners/directors ?
Any new lending/ refinancing will be a commercial decision by the Banks. They don't' have to lend....a 20% loss is a 20% loss. The Government can 'afford' their share ; the banks, not so much.( as the majority shareholder in an insolvency case, I guess the Government could take over the whole lot?).
I think there will be some devil in the detail with this one - such as the loan coming due now, or soon and the lockdown having a significant impact on it being paid back. Longer term loans should be a little more robust? (But then with existing, pre-COVID, attitudes just how many business's are that robust?)
Madness. Instead of a good ole fashioned recession to clear out zombie companies, the government will prop them up with taxpayer backed loans! As if we hadn't already lumped enough debt onto future tax payers. This government must HATE children, because it's ensuring their lives will be under a huge debt burden.
They are throwing the kitchen sink at everything to avoid a recession, which is exactly what we need. You want productive businesses government? Propping those without a rainy day fund or those barely surviving already on debt with risks of default falling on the TAXPAYER is just balmy. They have no incentive to be more productive, to become more resilient or to ever pay back their loans. And what's the risk to them if they don't? Nothing!
So businesses will be able to borrow to fund working capital only. Rent, wages, outgoings. Will there be any collateral required? Will the assets of the business need to be valued at least 20% of the loan in a potential fire sale situation? Will personal assets be required as collateral I.E. Family Home. Otherwise, in the SME sector, there will be loans made to businesses that can't survive. They will go into receivership or liquidation and the government will end up writing off 3 - 5 billion. What are the interest rates and terms? If its better than what they already have hanging over them. Why not let them refinance and put up the same assets as collateral as they already have at risk.
Perhaps it helps to formulate the positive and negative consequences
What we do want:
• Preserve the productive economy
• Buffer financial harm to individuals caused by government shutdown
What we don’t want
• Temporary unemployment to become structural unemployment
• Expansion of the FIRE economy
• Blind transfer of risk from banks to government
• Blind transfer of bank liabilities to government balance sheet
• Moral hazard to set in around rescue packages
• Wealth transfer to corporations as a result of government policy
• Wealth transfer to overseas entities as a result of the crisis
Thanks Murray, I fixed that little typo. Forgive me for thinking out loud. I'm honestly struggling to get my head around the magnitude of what's happening. Do we get inflation or deflation? Is my wealth safe? Global mass unemployment must be highly deflationary, but the massive monetary and fiscal response is inflationary. Global industrial production has come to a halt. A destruction of output was possibly the root cause of inflation in the Wirmar Republic and Zimbabwe. Then we have all this moral hazard everywhere, and an out of control finance industry with every man and his dog clambering for a bail out. If you think about it too long it makes your head spin.
There's couple to be clarified from my point FP: preserve the current 'productive economy'? sadly it's tangled with what 'we' don't want, the FIRE economy. The buffer & unemployment agreed to those.
Those two blind transfer? it's happening as we type each other here. (as they said it's 'our' only options).
Moral hazard, it's happening.. watch those devils in details.
Wealth transfer to corp. - well wake up a bit.. AirNZ just a starter. next Fletcher?, Tiwai point? many more impacted RE industries come thick & fast.
Wealth transfer to overseas.. this will be done in more toned down/normalised way eg. The Head Office movement of ANZ OZ/NZ to Shanghai for future example.. the reason: we must close to the economic engine of the world, huge customer potential yada-yada.
Thanks for listening Grant Robertson. Nows what's happening about no virus testing on weekends? Jacinda needs to go and you would make a better captain.
"by Houseworks | 27th Mar 20, 2:40pm
... So it goes that if landlords feel they cant make it then help them out and give them a handout ... Finally if you dont like the thought of landlords being subsidized then Grant Robertson should shut his mouth and not make comments directed at landlords demanding they provide rental relief to tenants."
Ouh, he can shut his mouth.. but please, shut the comments too if he started to lobby back to formalise the 'Cullen CGT' back on the table. After all as 'essential service' the implemented CGT funds, shall be back again for all NZers benefit? or Not?.. which ever you fancy look at it.
An eye opener is a few of the excluded activities;
"Processing whale meat" sort of makes sense.
"Manufacturing recreational cannabis" - this is still illegal isn't it?
and then -"Manufacturing or testing cluster munitions, anti-personnel mines, or nuclear explosive devices (NEDs)"! I am now curious as to just how much of this activity takes place in NZ in normal times?
This looks like a massive print up and pass to the banks to promote a greater blanket leverage up. At this rate everyone will be using $20 dollar notes to wipe their butts because toilet paper is much more expensive. Surely the undercapitalised and over extended should just be allowed to collapse.
Yea, finally it's started let's socialised the loss, all those business backup by 'property' loan guarantee, as we all can guess (except by the wider public off course) to be bail out.. by all tax payers .. and the recipients? all line up.. from Alpabetical order: A** (two of them at least), B**... W** - It's one sure bet for the properties/RE industries here in NZ folks! - In every major adversity Banks quickly aligned themselves.. to most poor NZers.. we're in this together .. 'as a Nation' - we are 'a country' - and as a country, 'we' shall not fail...kick/ban that Tui ads billboards please.
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