From strong growth in the property development sector; a growing focus on ESG-focussed debt products; and an increase in unitranche facilities for acquisition financing, we look ahead to the rest of 2021 and share some of our key predictions for banking and finance.
Real estate development finance
Since the initial months of the pandemic, property markets have strengthened significantly in most capital cities and regional areas. For this reason, we are seeing continued strong growth in the property development sector coupled with a willingness of most bank and non-bank lenders to provide funding.
In markets like Perth, which had been subdued for years, this has translated not only into more deals, but also bigger deals. We think this trend will continue for at least the first half of 2021, but it will be interesting to see where the market settles once the government stimulus of the industry is withdrawn.
At this stage, our prediction is that the banks and non-bank lenders are still keen to build their book, so growth will be sustained throughout the whole of 2021.
Throughout the rest of 2021, CFOs continue to face a number of challenges, with the most apparent being an ongoing uncertainty with regard the national and global economy as the effects of the COVID-19 pandemic continue to ripple through.
While COVID-19 has brought disruption, it has also brought opportunity and increased growth for many industries. These industries will need to consolidate and consider the permanence of their growth if the vaccine proves effective and CFOs will continue to look for balance sheet resilience and potential headroom in their financing facilities to ensure sufficient financial resilience to cope with whatever the year may throw at them.
Also high on the agenda for corporate treasurers will be enterprise risk management. The corporate treasury and finance function is key to driving diversification and flexibility across sources of debt financing; shoring-up financial risk management in the face of further potential business disruption (including through financial risk management products to lock in low interest rates and guard against cash-flow uncertainties); and funding increased corporate spending needs in areas such as technology infrastructure and digital transformation.
From a product perspective, just as environmental, social and governance (ESG) is a focus for boards, ESG-focussed debt products are on the rise. We are also seeing growing interest in Sustainability-Linked Loans (SLLs) in the market, where corporate borrowers are incentivised to achieve predetermined ESG-related targets to benefit from improved pricing through lower margins on their loans and which can be deployed against a range of loan types and for various corporate purposes.
With many ESG-minded corporates and funds outperforming the market, we anticipate more corporate treasurers will be taking steps to integrate ESG into corporate financial strategies going forward.
Project finance in Australia should be equal to or better than 2019 and early 2020 (before COVID-19 threw a spanner into the financial markets). The Reserve Bank of Australia’s engagement in quantitative easing and public confirmation that interest rates will remain low for at least the next three years, supportive fiscal policy from governments looking to spend big on infrastructure as a way out of COVID-19 and companies looking to shift their growth projects off-balance sheet supports this prediction. In terms of specific asset classes, a particular focus will be infrastructure projects in the regions. This reflects the COVID-19 trend of a general population shift from cities to regional areas and the Northern Australia Infrastructure Fund increasing the rate at which it awards funds.
We expect a number of deals to close in the energy sector. Large scale wind and solar projects continue to be prominent due to their ‘green’ credentials but are facing growing connection and regulatory intervention risk due to uncertainty over timing of connection and regulators forcing operators to disconnect from the grid in certain regions. The barriers to new wind and solar projects should fall away if the final investment decisions are made on a number of the transmission and grid security projects currently in the works. Gas generation projects and LNG import terminals are also a possibility but are very much subject to political outcomes.
Outside of the traditional infrastructure and energy projects, there is an emerging pipeline of bankable alternative energy projects, such as energy from waste, bio-gas and even hydrogen, although hydrogen is still in its infancy. There is also an emerging pipeline of critical mineral and rare earth projects which are key inputs in batteries and other renewable technologies. 2021 will hopefully be the year in which these projects test the market (if they have secured sufficient government support) and so we earmark it as an asset class to watch.
In addition to the positive outlook for project finance in Australia we expect 2021 to be the year of the leveraged buyout.
Traditionally, projects and acquisitions in Australia have been financed by domestic and international banks on a syndicated basis and we see this continuing in relation to project finance. However, the position is different with respect to the financing of acquisitions. In the last few years in Australia Term Loan B (TLB) and unitranche facilities have played a substantial role in acquisition financings and we expect this trend to continue, and there is potential for unitranche loans to take a larger slice of the pie.
Over the last decade, unitranche facilities made available by credit funds have become one of the key financing sources for borrowers in the European leveraged finance market. While such facilities may not yet be a principal source of debt financing in leveraged transactions in Australia (they accounted for approximately 15% of such transactions in the first half of last year and approximately 19% in 2019), in our view, it is likely that they will continue to increase their market share due to the flexibility they offer borrowers and sponsors, including in terms of covenant packages. In addition, they can be a fairly straightforward way for credit funds to apply large amounts of capital in relation to individual transactions.
A key issue for borrowers will be whether the flexibility, relatively quick execution and bespoke terms they may be able to achieve in a unitranche financing offset the higher interest rate and call protection, particularly given the current low interest rate environment. We anticipate that a growing number of sponsors will view the benefits of unitranche loans as outweighing any disadvantages vis-a-vis other funding sources.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.