A number of local corporate borrowers have been forced to learn about “funding risk” the hard way over the past six months. In its design and recommendation of appropriate treasury management policies for larger corporate borrowers, APRM has for many years required a funding risk limit system (minimum and maximum percentages) that forces debt maturities to be spread over two or three time buckets out to 15 year forward. Borrowers with a good spread of term facilities/loans complying with such a limit regime would not have faced the “funding risk” issues other faced with the global credit shock blew up last year. It seems a number of borrowers were too reliant on “uncommitted” borrowing facilities from banks and had to scramble to fund elsewhere when lending banks shifted lending conditions and margins. Several other borrowers also use uncommitted lines to borrow off the call market from banks at the OCR rate, saving the 90-day margin above OCR. When the credit crunch hit these favourable arrangements suddenly changed on the borrowers.
For borrowers heavily dependent upon short-term, committed, direct bank lending facilities that were maturing in the second half of 2007, the concentration of refinancing risk at a bad time was sheeted home. Some bank lenders used the opportunity to lift fees and margins where there was less competition and they could get away with it. Other banks took the opportunity to curry favour with the borrower and sliced-off a larger share of the lending pie by keeping their pricing the same. Managing funding risk is not just about spreading refinancing risk and maturities over long time periods. For the larger borrowers (>$750m of debt) it also requires diversification of funding sources and the ability to tap debt markets windows of opportunity when they open up.
Those larger corporate borrowers who accessed the 10 to 20 year long-term US Private Placement debt market over the last five years at (now) very low credit margins are so much better placed than those that relied on the local bank and corporate bond market. The domestic Commercial Paper debt market has always been one of the more attractive funding source in terms of issuance margin. Corporate names have been able to continue to fund from this market despite the sharp increase in margins from 3 basis points to 23 basis points. Mortgage-backed securities and other structured credit issuers have been put on the “no go” list by commercial paper investors. Some CP issuers (e.g. Gough Securities) acted quickly to change their issuing name to a stronger corporate one, instead of a structured credit name. The Bank of New Zealand have been reported as bringing their “Titan” off-balance sheet funding conduit back onto their balance sheet and have ceased funding from the CP market.