ADCM Services principal Dr Philip Bayley said the research for his PhD thesis shows corporate borrowers without term funding are “at risk of being held up by their bankers and paying considerably more for their term debt funding than those with alternative sources of debt such as corporate bonds”.
Mr Bayley said the average corporate credit spread is 58.9 basis points while the average syndicated loan spread is 76.1 basis points.
“For companies that have the option of using either market, robustness testing shows the average price difference to be six basis points or $1.5 million a year in favour of corporate bonds,” said Mr Bayley.
Consequently, Mr Bayley said it is other features aside from price that have drawn clients to syndicated debt.
“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,” he said.
However, Mr Bayley said 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”.
Australian Centre for Financial Studies executive director Professor Deborah Ralston said the research conducted by Mr Bayley for his PhD thesis covering non-financial companies on the ASX from 1996 to 2010 shows bond issues largely dominated the market up until 2003.
From 2004 to 2010 she said syndicated loans began to lead the market.
“Fifty two companies issued 140 bonds in the domestic market and 130 companies took 212 term syndicated loans over the period,” said Ms Ralston.
Ms Ralston said despite these figures she does not believe the corporate bond market has been stifled by direct competition in the banking sector, but rather that “competition from the international banks in the syndicated loan market 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,” said Ms Ralston.
