Professor Deborah Ralston
The Australian corporate bond market has struggled to compete against syndicated term loans, despite a pricing advantage, says Dr Philip Bayley, Principal of ADCM Services.
Addressing an Australian Centre for Financial Studies briefing session yesterday, Bayley said the bond market was the poor cousin to debt syndications even though the average corporate bond credit spread was 58.9 basis points compared with the average syndicated loan spread of 76.1 basis points.
Bayley, whose address was titled “Factors influencing access to and the price of funding in the syndicated loan and corporate bond market and was the theme of his PhD thesis, said: “For companies that have the option of using either market, robustness testing shows the average price difference to be six basis points ($1.5 million a year) in the favour of corporate bonds.
“As a consequence it is other features aside from price that have attracted clients to syndicated debt and not direct pricing. For example, here is a perceived convenience and no need for a credit rating, while the volume of funding available and declining bank net interest margins are found to be statistically significant.
ACFS Executive Director Professor Deborah Ralston said: “This is excellent research that helps provide the evidence base for the dynamics underpinning the emergence of a corporate bond market.”
Bayley’s research, which covers the period from 1996 to 2010 and focuses only on non-financial companies listed on the ASX, illustrates that bond issues largely held their own with syndicated loans up to 2003, but from 2004 to 2010 the latter have dominated the market. Fifty two companies issued 140 bonds in the domestic market and 130 companies took 212 term syndicated loans over the period. All were denominated in Australian dollars.
“Despite these numbers, I am not arguing that the corporate bond market has been stifled by direct competition from the banking sector.
“Instead, it’s the result of competition from the international banks in the syndicated loan market that has driven the Australian banks to be so competitive in this space
“The domestic banks have undertaken more syndicated lending to preserve their corporate relationships – and the bond market has suffered collateral damage as a consequence of this competition.”
Bayley says the domestic banks have resisted the temptation to use syndicated debt as a loss leader.
“My research shows there’s no evidence to show that banks are ‘buying’ syndicated debt deals. Indeed, corporate borrowers without term funding options are at risk of being ‘held-up’ by their bankers, paying considerably more for their term debt funding than those with alternative sources of debt such as corporate bonds.
“Moreover, simply having a credit rating, regardless of whether it is investment grade or not, can considerably reduce a borrowers cost of debt by signalling to the borrower’s bankers that it has term debt funding options.”