You Can Run But You Can’t Hide

Finance chiefs around the world agree that credit is hard to come by and there is little relief in sight.

Robert DeLuca, executive general manager of corporate financial services for Commonwealth Bank, one of Australia’s big four banks, puts it plainly. “The availability and the cost of capital have changed a hell of a lot over the past six months,” he says. “It started last year at the high end and has now moved into the mid-market as well. There are a number of different factors. Obviously for our bank and other financial institutions, there’s the ability to raise capital and what it’s costing us to raise it in the wholesale market. We’ve also started to increase the risk margin. Terms and conditions have become a lot tighter. Previously, banks were prepared to give out credit on much looser terms. Now we’re looking for more security, less gearing and more guarantees from owners and directors of the company. We are also less prepared to back businesses that don’t have a strong history of profit or cash flow.”

While Asian banks, like their US and European counterparts, are pulling back in response to the higher risk of defaults, most remain comparatively healthy. Indeed, a bright spot, experts say, is that the retrenchment on the part of large banks has given smaller regional players a chance to step in. Austen says that local banks see an opportunity to capture some market share. But, he adds, there’s a danger that these banks will “dive in and catch all the credit losses expected in the next couple of years.”

From a corporate perspective, any involvement is seen as positive. When Straits Asia, a Singapore-listed coal-mining company that was spun off from Australia’s Straits Resources in 2006, sought refinancing on a $300m loan in late November, it got a hard lesson in just how bad things had got.

The company had to pay 325 basis points over Libor. And to convince its lender, Standard Chartered, to take the full loan onto its balance sheet, it issued 35m warrants to the bank. The warrants (which have a strike price of 20% over Straits Asia’s stock price at the time of the loan) mature when the loan is due in May 2010.

It was hardly the deal that CFO Jim Carter hoped for, and just three months before it was struck he faced a far rosier outlook. Seeking, at that time, a five-year, $400m loan to replace a $200m bridge loan, Carter found that the members of the ten-bank syndicate that provided the original loan were most receptive. “There were some core banks we had been building relationships with,” says Carter. “They knew us and understood mining. A five-year loan for $400m sounded achievable.”

Then came the September meltdown. “We were trying to refinance in the middle of the worst markets most of us have ever experienced,” he recalls. “Our banks were in pretty good shape, but there was a whole change in sentiment. It got worse and worse. By the last week of September, any company that had funding coming up in the next three months was getting hammered in the market. People were saying ‘You’re not going to be able to refinance.’”

“Credit committees had completely changed,” adds Carter. “The level of questioning and due diligence bacame a lot more detailed. People were saying that the syndicated market was closed for the year. We needed a needed a plan B.” That plan B came when one-and only one-of Straits Asia’s core banks came forward with the offer to do a bilateral loan for a smaller amount and shorter term than Carter had wanted.

The CFO had to address one potential wrinkle: issuing the warrants would dilute existing shareholders by 3%. Carter sounded out the company’s major shareholders on how they felt about the refinancing if it meant dilution? “The response was overwhelming,” he says. “They said, ‘If you can secure financing, do it. You can live to refinance in better times.’”

“We realised that it wasn’t the time to be trying to screw the banks for the last basis point,” Carter continues. “The equity markets are closed. The debt markets have been closed for a long time. There just aren’t any other options.”

Additional reporting by Russ Banham and Don Durfee.

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