Corporate borrowers in New Zealand who have not operated a strict “funding risk control limits” regime as part of their treasury policy, that forced the spreading of debt maturities over multiple years, are now paying the price. The pricing levels (credit spreads) and term availability from bank/debt markets today has fundamentally changed to what was available from the markets in past years. The old treasury management adage that you always borrow from debt capital markets when the “window of opportunity” is open, even though you may not need the funding at that time, has been reinforced yet again. Standard & Poor's reported last week that New Zealand and Australian corporates have their debt refinancing plans well in hand despite the global credit crisis. They report that 18% of the $155 billion of outstanding corporate debt is set to mature in 2008.

The cost of replacing that debt will clearly be higher and investors will now require strengthened covenant protection. Standard & Poor's, however, single out one of New Zealand's largest corporate borrowers, Fonterra, for special mention because they have a high 40% of their $6 billion of debt maturing this year. Fonterra do hold sufficient cash balances and undrawn bank facilities to meet this debt repayment schedule, so they do not necessarily have to come back to the debt markets for large amounts in adverse market conditions.

An examination of Fonterra's balance sheet would suggest that up to $3 billion of their $6 billion of debt is required to fund short-term assets such as inventories and debtors, therefore shorter-term funding facilities are applicable. Their remaining $3 billion of debt funds intangible assets (brands and goodwill) and some fixed assets, if it is assumed that their $5 billion of equity effectively finances $5 billion of fixed assets (plant and property) Fonterra's relatively short-term debt maturity profile is justified given the nature of, and economic life of the assets being financed. Arguably less justified is the relatively short 3 years weighted-average maturity of Auckland International Airport 's debt. AIAL put in place $550 million of new bank syndicated debt facilities in March to support their CP programme and for liquidity purposes.

The new debt terms do not increase the three year average. AIAL's $900 million of debt finances long-term fixed assets of land and buildings, assets with very long-term economic lives. This mismatch between the debt and asset maturities can often be tolerated from a funding risk point of view if the company is lowly geared and has a high credit rating i.e. a high capacity to borrow easily. That used to be the case with AIAL, but ownership battles and the prospect of balance sheet restructuring has reduced their long-term credit rating to single A (credit watch negative). The weighted-average debt terms of other major borrowers are Meridian Energy 7 years, Transpower 5 years, Contact Energy 4 years, Mighty River Power 10 years and Telecom 6 years.