19/09/2012 - 10:55

Banks walk tightrope on troubled loans

19/09/2012 - 10:55

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The commercial lending departments of the big banks will be on high alert as some major clients hit market headwinds.

The commercial lending departments of the big banks will be on high alert as some major clients hit market headwinds. 

After the boom comes the paperwork nightmare. That is the only certainty from the rising tide of corporate “troubles” in the mining, media and retail industries.

On highest alert are the commercial lending departments of Australia’s biggest banks, which are facing a double-edged problem.

Firstly, the directors of exposed banks will be asking whether the legal department has written watertight loan agreements with big clients.

Secondly, the directors will be asking how to handle loan breaches, such as violations of a covenant (promise) signed by a borrower.

Making the right decision on what to do with a non-compliant customer is the closest to tightrope walking a banker will ever get because of past difficulties, such as a legal thrashing in the famous Bell Group insolvency case, and more recent examples of banks trying to reclaim loans made to property developer Luke Saraceni and fertiliser maker Pankash Oswal.

As in previous times of falling prices and rising costs, the so-called “naked swimmers” will be exposed first, with that delightfully explicit term coined by one of America’s richest men, multi-billionaire Warren Buffett.

It was during the global financial crisis, a time when Mr Buffett added to his fortune as others were losing theirs, that he famously remarked that: “It’s only when the tide goes out that you discover who’s been swimming naked.”

While a detailed explanation is probably not required, what Mr Buffett meant was that tougher business conditions, and tighter bank lending rules, are the equivalent of the tide retreating, leaving people without sufficient equity in their business exposed, unable to pay their debts as they fall due.

There are currently at least three big business customers keeping bankers awake at night in Australia. They are:

• Nathan Tinkler, the coal entrepreneur who failed to proceed with a proposed $5.20-a-share privatisation takeover bid for Whitehaven Coal. That “miss” contributed to Whitehaven’s share price dropping below $3 last week as speculation swirled around Mr Tinkler possibly having to sell his 21 per cent stake in the miner, which has been hurt by the sharp fall in the coal price.

• Andrew Forrest, the iron ore entrepreneur, who has embarked on a major expansion of the business he founded, Fortescue Metals Group, just as the iron ore price collapsed, exposing him to the pincer effect of servicing higher debt levels from falling revenue.

• Nine Entertainment, owner of the Channel Nine television network and a number of magazines, digital media and event ticketing, is facing a showdown with a syndicate of lenders owed $1 billion. Differing solutions to the debt problem have surfaced, but right now Nine fits the description of a naked swimmer.

Interesting as it is to consider the problems of debt-laden businesses, it is perhaps more interesting to marvel at the repetition of the issues and to ask the most basic question of all in a troubled bank-customers relationship; who caused the problem?

Did the people running the business simply borrow too much and then discover that projected revenue fell short, or did the bank lend too much without first double-checking the client could service its debts.

In the Bell Group case, a number of courts have found that the banks ought to have known a lot more about the financial health of the client, and whether the client was telling the truth, before extending loans, a legal view which some people find difficult to accept because it is effectively asking a bank to have a man in every boardroom.

But, with the Bell case ringing in bankers’ ears, there is no doubt that every last comma, full stop, preposition and verb is being analysed by the finest brains in the legal world before anyone pulls a loan covenant trigger.

Naked politics

Naked swimmers are one interesting, if not distressing, thought to hold. Another is naked fishermen or, more correctly, naked politicians playing fishing games.

The incident that conjures up that interesting vision is last week’s remarkable policy backflip over the Abel Tasman super-trawler by the federal government.

Many words have been written about the last-minute change to the law in regard to the trawler, both in favour of banning the ship from Australian waters, and about the problem of reneging on a deal, which had been approved by the government’s own scientific advisers.

Of far more interest than any of that, is the astonishing similarity to an event which occurred in NSW some 20 years ago when foreign minister Bob Carr was premier of that state.

Senator Carr, despite the best scientific advice, refused to permit the development of the Lake Cowal gold mine because, believe it or not, something unknown might occur in the future.

Think about it, on the basis of a possible but unknown event, the mine approval was withheld despite the appalling precedent set, which is based on the “science” of the future possibly being different to today. Solution: do nothing.

Much to Senator Carr’s amusement, it was pointed out that such a view came directly from the Yes Minister comedy television series when approval for a chemical plant was withheld because “it would be irresponsible to deny after further research its manufacture might be found to be associated with health risk”.

Life has mimicked art at Lake Cowal and in the Abel Tasman incident, with the common link appearing to be the move by Senator Carr from state to federal politics.

Whatever the cause, the message sent to investors is simply awful.

Rich question

What defines a rich person is becoming an interesting subject, especially in depression-hit Europe where the French government is leading an attack on the wealthy by introducing a new 75 per cent tax rate of incomes exceeding a million euros ($1.25 million)  – a tax which reportedly will catch just 3,000 of the country’s 66 million people.

In Britain, a “mansion tax” has been proposed on houses worth more than £1 million ($1.5 million) and in Australia there are reports of higher taxes on self-managed superannuation funds valued at more than $900,000.

It’s a bit late in the day for a change but perhaps someone might like to reword the famous saying by the late Chinese leader, Deng Xiaoping, that: “To grow rich is glorious”, adding that it also brings an unexpected tax burden.

 ***

“The politician is an acrobat. He keeps his balance by saying the opposite of what he does.”

Maurice Barres

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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