2021 trends for banking and finance
The strong growth of the real estate development sector; a growing focus on ESG-focused debt products; and an increase in unitranche facilities for acquisition finance, we look into the remainder of 2021 and share some of our key forecasts for banking and finance.
Financing of real estate development
Since the first months of the pandemic, real estate markets have strengthened considerably in most capitals and regions. For this reason, we are witnessing continued strong growth in the property development sector coupled with a willingness of most bank and non-bank lenders to provide financing.
In markets like Perth, which had been quiet for years, this meant not only more trades, but larger trades as well. We believe this trend will continue for at least the first half of 2021, but it will be interesting to see where the market settles once the government stimulus from the industry is withdrawn.
At this point, our prediction is that bank and non-bank lenders are still keen to build their portfolios, so growth will be sustained throughout 2021.
Throughout 2021, CFOs will continue to face a number of challenges, the most evident being lingering uncertainty about the domestic and global economy as the effects of the COVID-19 pandemic continue to mount. to be smelled.
While COVID-19 has brought disruption, it has also brought opportunities and increased growth for many industries. These industries will need to consolidate and consider the sustainability of their growth if the vaccine proves to be effective and CFOs will continue to seek balance sheet resilience and potential leeway in their financing facilities to ensure sufficient financial resilience to cope. to whatever the year has in store for them.
Business risk management will also be a priority for corporate treasurers. The company’s treasury and financing function is essential to foster diversification and flexibility in sources of debt financing; strengthen financial risk management in the face of new potential business disruptions (including through financial risk management products to lock in low interest rates and guard against cash flow uncertainties); and financing the increased spending needs of businesses in areas such as technological infrastructure and digital transformation.
From a product point of view, as well as environmental, social and governance (ESG) is a priority for boards of directors, ESG-focused debt products are on the rise. We are also seeing a growing interest in sustainability-related loans (SLL) in the market, where corporate borrowers are incentivized to meet predetermined ESG targets in order to benefit from improved pricing through lower margins on their loans and which can be deployed across a range of loan types and for various purposes business.
With many ESG-conscious companies and funds outperforming the market, we expect more corporate treasurers to take steps to integrate ESG into corporate financial strategies going forward.
Project funding in Australia is expected to be equal to or greater than 2019 and early 2020 (before COVID-19 throws a wrench in financial markets). The Reserve Bank of Australia’s commitment to quantitative easing and public confirmation that interest rates will stay low for at least the next three years, with supportive fiscal policy from governments looking to spend big bucks in infrastructure to get out of COVID-19 and companies looking to change their off-balance sheet growth plans support this prediction. In terms of specific asset classes, particular attention will be paid to infrastructure projects in the regions. This reflects the COVID-19 trend of a general population shift from cities to regional areas and the Northern Australia Infrastructure Fund increasing the rate at which it provides funds.
We expect to conclude a number of agreements in the energy sector. Large-scale wind and solar projects remain important due to their “green” credentials, but face increasing risk of connection and regulatory intervention due to uncertainty over the timing of connection and regulators forcing operators to disconnect from the network in certain regions. Barriers to new wind and solar projects are expected to fall if final investment decisions are made on a number of transmission and grid security projects currently underway. Gas production projects and LNG import terminals are also a possibility but are highly subject to political outcomes.
Outside of traditional infrastructure and energy projects, there is an emerging pipeline of bankable alternative energy projects, such as energy from waste, biogas and even hydrogen, although hydrogen in is still in its infancy. There is also an emerging pipeline of critical mineral and rare earth projects that are key inputs in batteries and other renewable technologies. 2021 will hopefully be the year in which these projects test the market (if they have secured sufficient government support) and therefore we dedicate it as an asset class to watch.
In addition to the positive outlook for project finance in Australia, we expect 2021 to be the year of the LBO.
Traditionally, projects and acquisitions in Australia have been funded by national and international banks on a syndicated basis and we see this continuing in terms of project finance. However, the situation is different with regard to the financing of acquisitions. Over the past few years in Australia, B-term loans (TLBs) and unitranche facilities have played an important role in acquisition finance and we expect this trend to continue, and unitranche loans may take a turn for the worse. a bigger piece of the pie.
Over the past decade, unitranche facilities made available by credit funds have become one of the main sources of finance for borrowers in the European leverage finance market. While these facilities may not yet be a primary source of debt financing in leveraged transactions in Australia (they accounted for around 15% of these transactions in the first half of last year and around 19% in 2019. ), in our opinion, it is likely that they will continue to increase their market share thanks to the flexibility they offer to borrowers and sponsors, including in terms of covenants packages. Additionally, they can be a fairly straightforward way for credit funds to allocate large amounts of capital to individual transactions.
A key question for borrowers will be whether the flexibility, relatively quick execution, and tailor-made terms they can achieve in unitranche financing outweighs the higher interest rate and protection against calls, especially given the current low interest rate environment. We anticipate that a growing number of sponsors will view the advantages of unitranche loans as outweighing the disadvantages over other sources of funding.