Financial Schools Reviews

Australian lenders may issue as much as $100 billion in offshore debt this calendar year, as they seek to restructure their capital in advance of tough new regulations that are expected to be imposed on the global banking system.

Australian financial institutions are already preparing for new regulations expected to be recommended by both the Australian Prudential Regulation Authority (APRA) and the Basel Committee, which calls for lenders to hold less of their rival’s commercial debt securities.

The new regulations will demand that globally, banks be requires to hold more liquid assets on their balance sheet, and is in response to the fact that many lenders required emergency injections of capital during the global banking crisis.

The big four Australian banks are among just 11 AA-rated institutions in the world.

NAB became the first issuer of credit in the year 2010, having sold more than US$1.75 billion in debt earlier in the week. Estimates of total Australian bank funding on wholesale international credit markets in 2010 top $100 billion and it is expected that debt issuance on these markets will be for longer terms of up to five years and beyond.

Analysts believe that APRA’s concern is centred around the flood of issues that are expected in the coming months and the risk that lenders end up holding far to much of each other’s debt.

The other worry is that with so much issuance by financial institutions, find managers will be unwilling to invest in all the deals being marketed for fear of concentrating their risk to heavily in a single sector.

This has meant that Australian banks have had to seek out new investors in offshore markets, investors who have previously no exposure to Australian financial institutions, which has meant that the risk premium demanded is greater and funding has to occur at a wider spread.

Australian lenders also face the prospect of having to increase the term of their debt. Instead of issuing paper which matures in between one to three years, lenders now have to consider issuing paper which matures in up to five years or longer and that has had the effect of blowing out the basis swap rate.

A basis swap is an interest rate swap involving the exchange of interest rate payment of two different floating rate financial instruments. This differs from a plain vanilla interest rate swap where the interest rate stream of a fixed rate instrument is swapped for that of a floating rate instrument.

The basis swap is the cost paid by lenders to convert debt raised in offshore international markets into Australian dollars. An increase in the basis swap rate means that the overall cost of issuing debt on international markets has increased.

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