The global credit crisis has been a classic “event risk” that has caught-out corporate borrowers who have been over-reliant on cheap and short-term bank committed funding facilities. The increase in bank lending margins for some is substantial, but this is not a market anomaly that will reverse any time soon. The anomaly was the very low corporate borrowing margins available in the NZ market place for the five years prior to mid-2007. Banks and institutional investors into Commercial Paper and corporate bonds were not being rewarded for the credit risk they were taking back then, arguably they are now being rewarded a bit too much! The credit market will eventually find a new level where investors/lenders and debt borrowers are both reasonably happy with the pricing.

The most succinct and accurate assessment we have come across as to what has happened was this quote from Vodafone's Global Treasurer, Gerry Bacon

“… In reality, what has happened is that credit is being priced according to lenders' liquidity rather than estimates for corporates' default risk. Many banks have depleted their capital base as a consequence of sub-prime and related write-downs. Those with stronger balance sheets are having to make choices about where to deploy their capital and the lack of banks' supply is moving margins. Link this to high credit costs for banks funding themselves and it means wider margins for all...” (“The Treasurer” magazine, August 2008).

In the new credit world bank lenders are allocating credit and being much more selective/stringent as to whom they lend to. Some local banks are only meeting existing customer's new debt requirements and not tendering at all for new lending propositions.

With their own wholesale borrowing margins increasing dramatically (ANZ paid 250 points over swap for five year money out of the US wholesale market recently) banks are seeking recoupment by passing-on such additional costs to corporate borrowers. In several cases we have seen, the banks are locating obscure and dubious clauses in loan documents to lift margins/fees in the middle of supposed five year fixed-pricing commitments. Depending on their bargaining position, corporate borrowers should hold bank lenders to their written undertakings and not cave-in to the pressure. The banks' own funding pressures are of their own making (poor past funding risk management) therefore they should now pay the price (i.e lower bank profits) for the funding risks they took.