Case Study for the the Bank Bill Swap rate (BBSW)

Key Learnings and case study of the Week 26.02.2024

Currently I have been working on a significant refinance transaction from a major bank. The debt is all effectively property investment ANZIC, meaning that the debt is secured purely against commercial investment properties. The credit assessment of the transaction is relatively straight forward as the bank only needs to see a ICR (interest cover ratio) of 1.5x. The calculations being (rental income after all outgoings)/ (total debt multiply by current interest rate).

This is an existing customer of my, whom I met when I was still working at Westpac commercial bank. He became a customer of my after I assisted him with a significant commercial property purchase (circa $ 9m). The opportunity came after his incumbent bank who holds significant debt exposure did not support him with the commercial investment purchase.

Rates were still relatively low at the time as COVID had just ended, but the market was pricing in rates rises. The customer engaged his banker 4 months prior to the purchase who was adamant that the bank had no issues in supporting him with the purchase. Came closer to the settlement, the banker than broke the news that his bank's credit team cannot support him as whilst the current matric stacks up currently at 1.5x ICR- the future market expectation is that rate rises will be steep meaning the calculation metrics would no longer fit the metrics.

I then placed the customer to one of the big 5 bank- who in the end, after discussions backwards and forward with the national credit team ended up supporting the customer and meeting settlement. The comprise was that he had to go on a fix rate so that he could meet his yearly reporting covenant, which the end worked out perfectly to his favor. He also had to reduce the loan/ debt amount which he fortunately had in this account given he has a trading business on the side. 

Customer was extremely pleased with the outcome as failing to meet settlement meant significant financial consequences. Now because of his experience, customer has given me the opportunity to get the best pricing and to tender his opportunity out to the market. 

KEY LEARNINGS 

• With most business loans, the base rate is based on the BBSY rate (BBSW + 5 basis points). There will generally be a risk margin and potentially a line fee (if redraw is required). 

• The BBSW rate is calculated directly from market transactions from certain high credit-quality banks during a certain window. The rate is freely accessible on the internet after 10:30am. 

• The risk margin is determined by bank's risk grade system. If it is a trading business transaction, they would complete the risk grading on the risk of the industry, profit & loss along with the balance sheet of the business. If it is a property investment transaction, they would look at the risk metrics presented on the valuation completed by an external valurer against the property as well as the LVR lent against the asset. 

• Some banks may charge a line fee as they feel that if customer has placed surplus cash in the redraw facility- they are losing money to be earnt from interest. In their eyes, this is the cost of capital.  

Customers should actually be focusing on the risk margins and line fee given that BBSY is a floating rate that is determined by the market.  At the moment banks are willing to comprise on the risk margins and line fee just to win market share. It is important for business customers to keep the bankers on their toes. 

True Inflation in the economy

Last week I attended a lunch hosted by Westpac and one of their economists gave a detailed outlook on the economy and an outlook for where the interest rates will be heading. One of the audiences brought up a good point in that the CPI index does not represent all production or consumption in the economy. He suspects that the true inflation (if everything is considered) is in their 10-11%.  I thought this was actually a very good point. It poses a thought as to what the true inflation in our economy really is.  

Updated Policy for commercial loan 100% funding

A big 4 bank can now consider extending $ 3m funding to cover 100% funding for owner occupied commercial property if the business has no historical trading losses and a strong balance sheet. The earnings on the profit & loss obviously have to obviously be strong to justify the lend. If the purchase price is $2.5m, the bank can also consider extending a $ 500K overdraft facility unsecured. 

If there are any live scenarios across your desk at the moment where you want to workshop- please give me a call on 0457 451 107

All the best for the week

Keith Ho  MAF, B.BFin

Director

Ho Finance- Finance Made Simple

Australia & New Zealand

LVL G/575 Bourke Street

Melbourne Victoria 3000

Australia

E:  [email protected]

M: 0457 451 107