Opinion: Banks could price themselves out of the market

Corporate borrowers with reasonable chunks of debt who are credit-rated above BBB will have to seriously examine the potential opportunity in 2009 of debt borrowing margins being lower from issuing debt securities in their own name, rather than borrowing from a bank. Medium terms notes and corporate bonds should find strong retail investor support as 90-day bank deposit rates head to 6.50% and the Mums & Dads seek a higher return. Institutional wholesale investors will also be seeking diversification away from the constant supply of bank names that are issued in the local market. Kiwibank found reasonable demand for their $60m of subordinated bonds issued last week at 5-year swap plus 185 basis points. The commitment term for buyers of these securities is 10 years, so a pretty good deal for Kiwibank in the circumstances. Expect to see corporate names come to the debt market for 4 to 7 year terms at pricing to the borrower that will be lower than what the banks can offer. The Australasian banks are paying between 120 to 140 basis points over swap for their new 5-year funding, so they will continue to lift their fees and margins to corporate borrowers for such terms. Mum and Dad investors could well go for household corporate names at fixed rates of 100 -150 points over swap giving the retail investors returns of 7.80% to 8.30% - superior credit quality to finance companies and way above bank retail deposit rates. These borrowing margins could be less than equivalent term bank margins. It diversifies funding sources as well. After many years of bank funding being the cheapest alternative, the market is changing rapidly which should result in the revival of a corporate bond market in NZ to meet investor demand. There are more subsidiary costs involved in a medium term note or corporate bond issue for the borrower (e.g. legals, brokerage and the prospectus) therefore all-up pricing has to be accurately measured against the alternative bank source. ------------------ *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.