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“As a result, they’re using their bank facilities to help fund their operations.”
Mr Miller said the trend should reverse as interest rates plateau, but in the meantime companies are wary of taking on expensive debt so are turning to shorter-term bank debt to give them flexibility.
“It’s been a very interesting year with the change in interest rate outlook and the cost of money and then there’s been bouts of volatility where the markets have simply not been open,” Mr Miller said.
“It’s probably going to run for a good 12 months and so it will be early next year that conditions become less volatile. Then you’ll see a lot more of that corporate debt being obtained from the capital market and less from the bank market.”
While all of the big four banks reported strong credit quality and mostly wrote back provisions for bad debts, Mr Miller said the businesses that struggled before the COVID-19 pandemic were expected to find it more difficult as liquidity pulls back.
“Now that we’re coming out of the pandemic those businesses that were challenged, or struggling pre-COVID are really challenged. Liquidity is less available and as rates go up, and more importantly, as business conditions are hit with cost inflation, that really impacts those businesses which were struggling prior to the inflationary settings we have,” he said.
“We’re seeing challenges in relation to businesses that were challenged pre-COVID. Now that we’re coming out of COVID, and into these tougher conditions, their business model, or their capital structure, is impacting them.”
But he said the overall outlook remains positive and more mergers and acquisition activity should result given good companies can still access credit relatively easily.
“It’s still pretty positive in corporate Australia. There’s still a lot of people who are worried about the outlook, but they’re still investing in their businesses and we’ve seen with Origin Energy [takeover bid] there’s still interesting mergers and acquisitions that can be pursued,” Mr Miller said.
“For the stronger companies with the stronger balance sheets, we’re now coming into an environment where valuations have come back, and the stronger companies can fund and can raise capital in this environment and pursue some of the opportunities that now make sense because valuations have shifted, and they’ve shifted more than the cost of capital for the strong company has moved.”
Mr Miller also cautioned that while rates have gone up incredibly quickly, taking many companies by surprise, the cost of funds is normalising after a period of exceptionally low yields.
“It’s not like we’re in the middle of just a truly crazy and very, very expensive level of debt. But it has moved faster than what people thought it would in terms of getting back to the levels we’ve seen today,” he said.
“I think we all expected these levels in the future, but probably not inside the first 12 months post COVID, we would have thought more likely in the first couple of years post COVID.”
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