News & Events Treasury

Treasury and Corporate Finance Insights for 2023

The team at Barrington Treasury Services have put together some insights into the Treasury and Debt markets of Australasia as we head into quarter two of 2023.

Corporate Finance Insights

Bank funding margins / appetite

Our corporate finance team has been busy closing a number of corporate funding/refinancing deals, covering both bank and non-bank solutions and working across both sides of the Tasman. Bank pricing dynamics remain extremely variable, and with little consistency in terms of which banks are ‘hungry’ on a particular transaction.
In a general sense, margins have stabilised, after trending higher through the back half of last year, but global banking woes could see a tightening of credit conditions – something US policymakers are certainly already warning about.

Providing end-to-end support across the funding tender/negotiation/documentation process, our funding experts are attuned to these banking sector trends and individual counterparty nuances. In a rapidly changing funding market, a little advice can go a long way to ensuring you get the best overall funding package – not just the ‘lowest’ price.

Non-bank funding

Whilst the Australasian market is dominated by bank funding, over recent years there has been a growing number of credit funds established. With now over 100 different funds active in the Australasian market there are opportunities for borrowers to establish funding arrangements that may better align with their needs and strategic objectives than are ordinarily offered through traditional banking arrangements.  Each fund has a ‘sweet spot’ meaning the approach to market can be tailored to suit the situation.

By way of example we have completed transactions in recent months ranging in size from $6m to $135m, with these undertaken in different ways – from highly targeted approaches, where in one case only two funds were approached, with both delivering funding offers, through to broadly canvassed approaches, where in one transaction over 40 different funders were approached in order to deliver a bespoke solution that best matched the client’s unique situation and growth aspirations.

For those looking for something a little different, talk to our funding experts.

Treasury Insights

(Bank) counterparty risk

Global banking sector stresses have provided a timely reminder that not all banks are created equal. While a good treasury policy will typically restrict treasury activities to highly rated counterparties (often A+ or above), provide for counterparty diversification, and regular counterparty exposure monitoring/reporting, those entities requiring an offshore banking presence can sometimes face limited choice and a banking environment unable to meet such sound banking partner thresholds. This can open up a weak link in treasury operations and one which can come back to bite if not carefully monitored and appropriate controls and governance processes established.

While credit ratings can be easily monitored and remains the most practical way of assessing bank health, the fact that Silicon Valley Bank was rated BBB (i.e. investment grade) just prior to collapse highlights that these ratings aren’t failproof. Few realise that a BBB rating approximates a 1 in 30 probability of default over five years (versus a 1 in 300 probability for a AA rated entity). While the lessons of the GFC have undoubtedly faded over time, the return of capital should always trump the return on capital.

Current events should be a prompt to all businesses to ensure they are appropriately managing their counterparty risks and have good visibility and internal governance around where the cash sits.

Interest rate volatility

Financial market turbulence has returned with a vengeance, particularly to interest rate markets. The Australian 2-year swap for example, has fluctuated between 3.25% and 4.25% over recent weeks (including a 35bp fall in one day), as central bank hiking expectations got doused by global banking sector risks. For those tasked with managing interest rate risks, recent moves highlight the importance of adopting a continuous approach to (interest rate) risk management, via regular dialogue and proactive strategy setting and review.

After more than 35 years in the treasury advisory space, we’ve found that short/sharp monthly updates provide a useful prompt to reassess hedging strategies, also acknowledging the myriad of competing demands on staff time. While all decisions should be made with the best available information to hand, the forward looking nature of the decision inputs invariably means hedging strategies need to be responsive to ever changing dynamics – both internally (business exposures) and financial market driven (pricing). In the case of interest rate hedging, decisions made today can have implications for many years to come.

Be sure your finance team has the expert support to make those decisions when opportunities present.

For advice or assistance, talk to the Barrington experienced treasury and corporate finance teams.