Top 100 CEO Interviews
Issue No. 43 - October/November 2008
Capital ‘crowding’ is T100 challenge
The grim truth struck home in September last year when mortgage broker RAMS was unable to refinance its multi-billion dollar debt and succumbed to takeoverby Westpac. When other heavily indebted enterprises sought to refinance and found no takers, the most serious global consequence of the American sub-prime lending debacle became apparent.
Access to capital, once a casual transaction, had changed from a buyer’s to a seller’s market. This revolution is shaking Australian companies’ sense of business as usual, according to Commonwealth Bank of Australia local leaders Peter Mullins and Justin Shaw, commenting this year on the financial environment facing our Top 100 South Australian companies.
Peter and Justin say not all T100 companies have felt the effects yet - but they will, even as the US Government has moved to head off a new capital crisis by bailing out Fannie Mae and Freddie Mac and other financial giants crash to earth.
As Justin explains, the global liquidity crisis came about because banks need to also borrow the capital they lend to their customers. The past year has unravelled a false economy, developed during the past 10 years, where borrowers and lenders enjoyed cheap and easy access to capital and failed to price risk correctly. Intense competition across the finance industry saw fundamentals and prudent lending practices sacrificed to ‘winning the business at all costs’ and gaining the best deal.
The cost of capital comes back to ‘good old supply and demand’ principles and associated risk of repayment. Before the US sub-prime debacle broke, funding premiums for longer term capital was only 10 to 20 basis points apart. Coming to the end of their three-year borrowing cycle and looking to renegotiate, firms are shocked to discover the gap is now 100-130 basis points. Bigger companies which have treasury departments
and deal in the $300m plus range understood quickly what was happening.
“Others thoug...
