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Communication counts when dealing with debt

THE pendulum appears to be shifting away from debt to equity as a source of fund raising, according to some of the State’s financiers.

Bank of New Zealand Australia business banking WA senior manager Daniel Donovan said the choice of debt versus equity depended significantly on the stages in the economic cycle and the relative cost differentials between the two options.

“At the moment I would think it’s very near balance where they both are at the same cost,” Mr Donovan said.

“A few years ago debt was a cheaper option but now I think it’s starting to shift the other way, where equity is becoming cheaper.”

Finance consultant Netfin managing director Paul Rowe said much of this change was driven by a credit squeeze from lenders.

“This is merely the stage in the banking cycle when the credit managers rule supreme,” he said.

“It isn’t that somebody changed the rules and forgot to tell anyone; they are just choosing to enforce them.

“Banks, like most public companies, are guided by shareholder need for high returns and low risk. In times of economic buoyancy, marketing managers within banks are given their heads to develop products and bring on business.

“When the picture of the economy is not so bright, credit managers are told to protect the bank’s existing position and view with scepticism clients wishing to swap from one bank to another.

“Financiers suddenly enforce credit guidelines that have been in existence since day dot and business people are left with serious cashflow problems.”

Mr Donovan agreed that banks often changed their positions on different sectors of the economy at various times in the cycle.

“There’s a credit quality squeeze at the moment that has nothing to do with the availability of money. The change has occurred automatically because the balance sheet of the bank must always be protected,” Mr Donovan said.

“While one part of our world is going through turmoil, other parts of the economy are going through a boom.

“For the past few years the oil and gas services industries have done very well.

“The service providers are the ones that have borrowing opportunities in WA. Primary producers have also done very well, while the engineering and manufacturing areas have continued to struggle.”

However, while some sectors may be viewed by lenders as having

a higher risk profile, Mr Donovan said companies were always viewed favourably if they managed to maintain a healthy balance sheet.

“Good credit always gets well supported. There is never a time in the cycle where good quality credit has a concern,” he said.

“We are very heavily driven by a company’s manager, performance and the company’s structure.”

Mr Rowe believes that, instead of complaining about the bank, businesses needed to communicate better with their financier, which could prove difficult during trading periods.

“We must return to a position where there is open and honest communication regarding bank credit policies and the financial health of a client’s business,” he said.

“If this were a doctor-patient relationship, where would we be if the patient hid their symptoms and the doctors withheld the cure?

“The first step to riding out the credit squeeze is to understand the financial needs of your business.

“If you need funds to expand, tell your bank. If you need funds because you are experiencing losses then have a plan to rectify the situation identified before you speak to your bankers.

“The second step is for financiers to listen, ask questions and, more importantly, understand what their clients need. Two-way communi-cation between financiers and business is the only solution that will actually negate the need for a credit squeeze.”

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