Opinion: Corporates don't trust banks to lend again for a long time

By Roger J Kerr It is difficult to tell who is panicking the most with all these corporate bond issues, the Mum & Dad investors in a rush to get a decent yield now that bank deposits are below 4.00%, or the corporate borrowers who have suddenly realised that reliance on banks for all their financing has not been a very smart debt funding strategy. Why Contact Energy and Fonterra feel they need to pay a margin of 4.00% over the swap market to secure 5 year funding is starting to elude me, I guess it says more about their poor historical funding risk management decisions than the pressures of the current situation. It may also tell us that their board of directors are prepared to pay a high price for debt funding certainty in a very uncertain world. These corporate boards obviously do not have any confidence that the banks will return as term funders to them for many years. They may also be concluding that it is going to be hard to raise new equity capital in the future, therefore they had better extend the weighted average maturity of their debt portfolios (virtually at any cost). Whatever the reason, the Mum and Dad investors are lapping it up with the Contact Energy issue increased from NZ$300m to NZ$500m and Fonterra taking NZ$800m from NZ$1 billion of bids for a NZ$300m issue. The banks will be losing retail deposit funds to go into these corporate bonds, but they won't need that cash as they will not be lending to big corporates for a while. Bank balance sheet growth is going to be a lot slower from here than what we have seen historically. The CEO of ANZ National claimed at the jobs summit meeting last Friday that his bank had leant NZ$3.9 billion in new corporate loans in the December quarter. He did not mention how much of that was re-financing and the level of loan repayments over that particular quarter. To see interest.co.nz's bond rush page, click here. "”"”"”"” * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com