The COVID-19 pandemic is causing significant disruption to Australia's economy. As our nation contemplates economic hibernation this winter, banks and lenders are experiencing an influx of relief requests from business customers. Banks and lenders are having to act swiftly to ensure they are responsive to the new economic stimulus packages and provide sustainable relief to customers.
In this article, partner Emma Donaghue explores what some of the economic relief packages mean for fund managers.
The Australian Banking Association (ABA) has implemented a Banking Relief Package, where participating banks allow businesses adversely impacted by
To be eligible for the Relief Package, your business must have less than $10 million total debt to all credit providers and not be in arrears at 1 January 2020. It is estimated the Relief Package will cover 98 percent of all businesses with a loan from an Australian bank.
In addition, banks have also agreed not to enforce business loans for non-financial breaches of the loan contract, such as changes in valuations.
Banks participating in the ABA's Banking Relief Package are also offering loans, including overdrafts, at very low interest rates under the Federal Government's Small and Medium Enterprises (SME) Guarantee Scheme. Under the Scheme, the Federal Government will guarantee up to 50 percent to SME lenders for new unsecured loans provided—
The Scheme applies to new loans made until 30 September 2020. It aims to encourage lenders to provide credit to SMEs and in turn help bridge the cash flow gaps SMEs are experiencing during this crisis. SMEs with a turnover of up to $50 million are eligible to receive these loans.
More information is available on the Australian Government Treasury website.
The Reserve Bank of Australia (RBA) has implemented schemes which aim to support the flow and reduce the cost of credit. The RBA has announced a package to put downward pressure on borrowing costs for businesses with the aim of supporting day-to-day trading operations.
The RBA has also announced a term funding facility for the banking system, where banks have access to at least $90 billion in funding at a fixed interest rate of 0.25 percent. This in turn reduces funding costs for banks and interest rates for borrowers. To encourage lending, the facility offers additional low-cost funding to banks if they expand their business lending.
The Australian Office of Financial Management has been provided with $15 billion to invest in structured finance markets. The program aims to assist smaller lenders which will not benefit from the RBA's term funding facility, such as non-authorised deposit-taking institutions and smaller authorised deposit-taking institutions, to access funding and support a competitive lending market. The benefit of a competitive lending market is borrowing costs stay relatively low and provide businesses with the ability to access more affordable loans.
For businesses feeling the effects of COVID-19, there is assistance available. However, before jumping into any deal with your financier, there are important considerations that should be made, including whether the bank's proposal is in the best interest of investors and what alternatives are available.
However, it is important to note that, apart from the package offered by the Australian Office of Financial Management, the above regimes do not apply to non-bank lenders. This does not mean negotiations will necessarily be futile, rather, it means negotiations should be approached in a different way.
As with any economic volatility, the current environment presents both opportunities and traps for fund managers.
If you require assistance with your debt financing needs, please contact a member of our Funds Management team who will explain your options and answer any questions you may have.