Even as we exit the COVID economic market, we still witnessed record growth in the Australian private debt market for 2021. Sebastian Paphitis of EY reported that the market grew to $133 billion at the end of calendar 2021, which accounted for circa 11% of the overall corporate and business lending market.
In the SME market, we continued to see growth in the number of financiers that were offering various finance lending products to customers. The continued conservatism taken by the major commercial banks are allowing the nonbank financier sector to continue to surge and grow quickly exploiting lending opportunities that previously the major commercial banks offered. Even with this growth, we are witnessing a greater lending appetite from the major commercial banks caused primarily from lower interest rates and the SME government-backed lending product.
As Sebastian Paphitis of EY has reported, the key market segments within the private debt space include corporate lending, leverage and private equity, real estate, infrastructure, asset back, special situation and distressed and finally, SME lending.
We saw the Australian corporate lending market set a new record in 2021, with total lending volume growing to $165.3 billion, a 55% increase in transactions completed on the previous year. This sector of the lending market was primarily driven by solid refinancing and merger and acquisition activity.
It is also expected that the growth in the private debt space will continue, thereby giving access to significant capital to potential borrowers in the forthcoming calendar year of 2022. Coupled with this is the ongoing market instability, which will impact pricing and create more opportunities in the private debt market, thereby growing funding, refinancing, and turnaround capital.
So what does this all mean?
As advisers, when clients approach you to seek assistance in dealing with many situations from growth to restructuring or even insolvency, advisors together with their clients should pause and consider whether a financing solution is available to you. Often, and as I have written in the past, businesses may very well be able to restructure financially distressed situations through a combination of refinancing and restructuring.
The significant availability of capital and a seemingly increased willingness of these financiers to lend in this low-interest-rate environment may create situations for borrowers to achieve their strategic or business needs.
Inflationary Pressures
It is expected that during 2022 we will see movement by the Reserve Bank of Australia in increasing interest rates and continued inflationary effects caused by the impact of unprecedented government stimulus as a result of Covid in the previous two years.
In countries like the United States of America, we are already witnessing signs of inflationary pressure and pressure on those central banks to raise interest rates. Combined with the unknown outcome regarding the Russian and Ukrainian conflict, advisers and their clients should continue to closely watch the impact of inflation, rising costs, supply chain issues, and staff shortages.
As I have written in previous articles, advisers should continue to ensure that their clients focus closely on monitoring their cash flow and forecasts for their businesses. This includes tracking any fluctuations from a revenue and expense perspective and then being ready and agile enough to shift course if they see signs of any crucial changes in revenue and expenses.
How can we assist
At Cathro & Partners, we have seen the insolvency market experience a gradual increase in the enquiry rate and “normalization” of insolvency appointments across the economy in recent months. Whilst the Australian Taxation Office has not recommenced any legal enforcement options around outstanding tax debts, we are now seeing various businesses that have fallen into heavy tax arrears start to look at the future viability of their businesses and take a more realistic perspective around their ability to pay back these debts.
And these businesses should not forget about the availability of capital that currently sits within the private debt space in Australia. With a combination of restructuring or even utilising the Safe Harbor process, if businesses act early enough, they may achieve a successful turnaround in their business. Combining such to combat the expected inflationary effects and its inevitable impact on the economy will arise in the forthcoming calendar year and 2024.
