Top finance tips 2010

Written on the 8 February 2010 by Tom Reid

Top finance tips 2010

2010 is already shaping up as one of anticipated optimism, but what does it really mean for the Gold Coast, Australia’s sixth largest city and the arguably the SME capital of the nation?

The real question is whether 2010 will really deliver the swing in the economy that so many business owners are praying for.

With the big banks’ interests set in retaining capital and safe investments, Hynes Lawyers partner and finance expert Scott Standen says it is likely that borrowing conditions won’t ease and businesses needing finance will struggle to recover with the rest of the economy.

“As a rule of thumb, I believe that banks may continue to make finance difficult to obtain in 2010. We have seen quality companies obtain bank finance, but this has come after extensive due diligence and comes with onerous covenants,” says Standen.

“On the Gold Coast, I expect that property developers will continue to struggle to attract bank finance but I certainly do not see a widespread crumbling of businesses. I think banks have been prepared to nurse businesses through and for the most part, I expect this will continue.”

Add to this a number of cautious investors, waiting to see what will happen on the ASX before throwing the dollars around, and perhaps 2010 is best looked forward to as a year of transition — allowing the economy to recover before the next big boom.

While property will continue to cop the brunt of a slow recovery, Standen says Queensland’s rich resources industry will not disappoint in its expected role of boosting the state economy.

“There is no question that the resource industry is the space to be. A number of our listed and unlisted resource clients have secured funding on relatively favourable terms,” says Standen.

“We also have a number of other clients looking at substantial fundraising (circa $200 million) and the investment banks are very keen to get involved. I don’t think these clients, who have excellent projects, will have difficulty raising the funds.”

With the true indicators of economic recovery yet to be seen, Gold Coast Business News has assembled a panel of industry heavyweights to raise their concerns, predictions and hopes.

The general consensus is that we’re not entirely out of the woods just yet.

SABER GROUP

Lending conditions
Obtaining finance in 2010 will continue to be difficult as the banking sector prepares for regulatory changes under APRA’s proposed alteration of the liquidity rules, coupled with the changes being introduced by the Basel Committee on Banking Supervision.
These changes will no doubt apply pressure on financial institutions to reduce credit availability and to pass on interest rate rises to borrowers.

Pressure on business
The major banks’ continued reluctance to lend particularly to small/medium firms has the potential to stunt the economy’s recovery and consequently lead to further bank calls leading to further business collapses during 2010.

Initial public offerings
Conversely, there does appear to be an emerging enthusiasm for profitable companies and the window is wide open for what’s expected to be a build-up of private equity deals to be staged, with IPOs or sales proposed as an exit strategy for investors.
In particular, it is already apparent that there is a renewed interest in IPOs in the Asian IPO markets and in general, technology companies planning IPOs may steal the limelight internationally.

Gold Coast’s star performers
Looking at the local economy, business within the electrical goods market and the IT industry will prove to be resilient during a sluggish economy. Local business providing services to the several government projects may also benefit from increased demand for products and services in the short term.

Emerging sectors
The emerging sectors nationally from this downturn will be the commodity sector (with some exceptions) and also the energies sector with predicted government support and initiatives, making this sector more appealing. IT will also play a role in the recovery of the economy with mobile telecommunications making significant contributions.

Recovery
In light of the recent interest rate rises and expected future rises, industries or sectors that are focused domestically and that promote discretionary spending (with some exceptions of course) are expected to struggle during the recovery phase in the economy.

GAMMA WEALTH MANAGEMENT

Lending conditions
Finance will still be difficult to obtain in 2010 with banks showing no signs of relaxing their lending criteria. We are starting to see more and more companies use capital raisings via the equity market as a source of funding.

We have also seen the banks try to retain as much capital in their accounts as possible by either reducing or removing certain fees on their accounts to incentivise customers to deposit more funds with them.

Pressure on business
Given that interest rates for businesses haven’t fallen in line with that of the residential mortgage market or the official cash rate, companies have had to sustain relatively higher interest rates compared to property owners. This combined with the decrease in retail spending over the past 24 months has placed increased pressure on businesses.

They have not received the full benefit of the decrease in the official cash rate and have had to resort to reducing overheads like reducing staff hours to cover the shortfall.
Businesses that have had their loans called in by their bank will find it very difficult to refinance elsewhere and may result in them breaching their covenants.

Private investment
Previously the banks were seen as the defensive investment on the share market however with the recent financial turmoil investors were quick to walk away from banks and buy shares in the new breed of defensive companies which were health care and retail/supermarket focused.

Companies like Woolworths, CSL, Sonic Healthcare, JB Hi-Fi and Metcash were in demand due to their strong cash flows, relatively low debt and strong branding.

When the market turned, investors were quick to embrace the banking sector due to their strong dividend yields and this in turn lifted the market, helping the investor sentiment to improve.
With the sentiment improving through the year, investors were willing to increase their risk tolerance and we started to see renewed focus towards the resource sector.

Emerging sectors
China’s demand for Australia’s raw materials continues, albeit at a reduced level and due to BHP and Rio Tinto’s ability to mine these commodities, like iron ore, at some of the world’s lowest cost of production rates this ensures they are able to maintain positive cash flow.

Sectors that are showing the brightest promise are the oil and gas sectors. Over 2008 and 2009 we saw a lot of activity by international oil and gas companies like BG and Conoco Phillips trying to gain a foot hold in the Australian market through takeovers and this does not look like it will diminish.

With the recent announcement of the Gorgon Gas Project, it confirms Australia plays an integral part in meeting the world’s energy demands.

Initial public offerings
It is not surprising to note that IPO and float activity peaked in the September 07 quarter with quite a marked decrease since then. I would not imagine this would change greatly while most companies and investors focus on placements and rights issues.

Once the market gains momentum, investor sentiment remains buoyed and the investment allocation towards corporate actions decreases then you will see an increase in demand by investors for IPOs.

Gold Coast’s star performers
The Gold Coast company that I think will be star performer for 2010 is Retail Food Group (RFG). With their recent announcement to acquire Big Dad’s Pies, this will complement their existing suite of brand name franchises including Brumby’s, Michel’s Patisserie and Donut King.

The company provides investors with good cash flow and strong management, which is integral when investing in an uncertain market.

Struggling recovery
Sectors that will struggle include the airlines and tourism. With the strong Australian dollar and fewer inbound tourists it will be some time before these sectors will recover.

There is quite a lot of discounting occurring and this is clearly evident at some of the local theme parks.

HLB MANN JUDD

Lending conditions
Banks are likely to keep the bar high in 2010 and will prefer to service existing relationships. The approach by the banks to lending will continue to be conservative with the value of assets used for security being interrogated.

The ability to service the debts will be important and the banks will not be looking too favourably on high lending rations.

Finance will be hard to obtain for those new and existing borrowers looking for high lending ratios with limited history of the ability to service debts. Additionally, banks will increase their level of scrutiny on borrowers once finance is approved with increased reporting requirements being required of many businesses.

The provision of accurate and timely financial information will be essential to maintain a good relationship with the banks.

Pressure on business
Generally banks will not call in loans if the borrower is meeting their commitments. The issues will arise where the business falls behind in their loan repayments or their borrowings are up for renewal.

Falling behind in loan repayments may trigger the requirement to repay the loan. If the business is unable to do this using other assets, the bank may well require the asset used as security for the loan to be sold.

Depending on the value received on the sale of the asset, the business may be able to continue. If the business has no other assets, the worst case scenario may be that the business has to be sold or it is unable to continue as it doesn’t have sufficient resources to cover to the day-to-day operations.

Businesses that are refinancing may also face a funding dilemma. The assets that were previously used as security may have dropped in value which may lead to the banks not lending as much. The problem for the business is how to finance the lending shortfall?

They may be required to use additional assets as security. If there are no other assets to use, the business may find that it has had to use resources to reduce the loan to the bank. This may impact on a business’ ability to grow or fund its day to day operations.

Private investment
A lot depends once again on the availability and affordability of finance as well as the sentiment of investors. Private investors will be wary of possible increases in interest and if they are investing will demand more return on their investment. Rising interest will create opportunities for those with cash to buy better priced assets.

While the markets have rebounded many investors will still be recovering from the turbulence in 2008 and 2009 and will be unlikely to invest in a big way in start up companies or businesses with little track record.

Additionally, the number of public companies going to the market for funding will impact on the size of the investment pool.
In regards to IPOs the majority are playing the wait-and-see game.

The Gold Coast’s star performers
Businesses that understand their customers’ needs, deliver them efficiently and have the resources to handle their growth; businesses selling their products online; construction businesses that will be handling the government funded education and infrastructure projects; creative industries — our reputation for movie making continues to grow; and environment related businesses that can help with the challenges of turning businesses to be ‘green’.

Emerging sectors
Technology and alternative energies should prosper as long as the government continues to support these industries through grants and funding.

Recovery
Property developments that do not have finance locked in will find it difficult to recover while tourism and holiday accommodation will take its time as the continuing strength of the dollar will hamper the industry’s chance of recovery.

MCLAUCHLAN & PARTNERS

Lending conditions

Finance for both residential and commercial purposes is likely to be harder to get as the banks look to shore up their balance sheets and avoid the more risky clients in an effort to minimise future bad or doubtful debts.

Pressure on business
Two years ago banks were fighting to provide finance to business, now they are not only reluctant to lend new funds they are also increasing facility rates (on bank bill facilities) as well as increasing interest rates when the Reserve Bank does and also above Reserve Bank rate adjustments on existing facilities.

With this in mind, if your existing finance provider calls in the debt not only will you find it difficult to obtain a new provider, if you do it is likely to be at a higher rate.

Those that can’t refinance will be forced to sell assets, at likely distressed prices, those that can refinance will have cash flow implications due to the higher cost of funds – both of these outcomes may result in businesses going under.

When a small business fails there is often a domino effect in the selling of other assets that were used to secure the business loans in the first place. Luxury homes and ‘toys’ often precede the business collapse.

The loss of any small business entrepreneur is bad enough pulling down others associated and employees is a very bitter pill for this nation.

Private investment
Not only are the banks looking to shore up their balance sheets, so to is the private sector. Recently local business entrepreneurs/identities have sought funds from offshore sources including sovereign funds as it is difficult to get funding domestically.

Initial public offerings
Locally I am not aware of any activity. The Queensland Government is looking to sell off public assets e.g. Queensland Rail which will result in an IPO.

Other than this I’m not aware of any other major IPOs. I do expect to see continued merger and acquisition activity, and I also expect to see more capital raising as companies look to shore up their balance sheets.

In saying that, there may be one or two companies that buck this trend and actually look at share buy backs.

The Gold Coast’s star performers
Difficult to see any star performers. Like the last 12 months I think most businesses will be happy to have the doors open in 12 months time. Australia may have dodged the text book definition of a recession but most small businesses receipts would show otherwise.

Recovery
Two sectors I think may struggle are tourism and certain sectors of the property market.

Unfortunately for the tourism sector the higher Australian dollar is a double whammy as international tourists are reluctant to come to Australia due to the increased cost and domestic tourists can now travel overseas at a reduced cost.

While we have continued migration to the Gold Coast the demand for property will be strong, which will hopefully result in increased building activity and keep local developers buoyant, many of whom have had indifferent 08/09 years and also keep local trades people employed.

As previously mentioned, the banks have tightened their lending standards so it is harder to obtain finance, further to this interest rates will continue to rise resulting in a decrease in property affordability. While many forecasters are predicting 10 per cent rise this year and next year in residential property prices, very few people had enjoyed more than CPI pay adjustments.

The International Monetary Fund has warned that Australian house prices are overvalued by 20 per cent. I hope to see property prices increase in line with these forecasts, but I won’t be holding my breath.


Author: Tom Reid

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