Banks' distressed debt seen as commodity ripe for marketing

Australia would benefit from the creation of a distressed debt market as it would allow financial institutions to on-sell bad debts and free up money to keep lending to customers, a report says.

While Australia's banks had little need for such a market because of the steady economic growth since the early 1990s, the main banks' level of bad debts at the end of fiscal 2008 almost tripled from the year before, the report by accounting firm PricewaterhouseCoopers and law firm Blake Dawson says.

The report is based on interviews with local banks, who hold the debt now, and firms that specialise in buying distressed debt.

"A 15-year boom time has meant Australian banks have never needed to participate in the global distressed debt market, which has an estimated US$50 billion ($94 billion) to US$100 billion of capital to invest," PWC partner Michael McCreadie said.

"Banks now have the opportunity to unlock capital tied up in non-performing loans and to start lending by making good loans to people and businesses."

Blake Dawson partner James Marshall said distressed investors could provide capital to both banks and distressed borrowers in order to facilitate successful restructurings.

"Australia is now firmly on the radar of offshore funds, institutional investors and private equity markets which are looking at distressed investing," he said.

PWC and Blake Dawson say there are global and local players who are willing to buy distressed debt and assets from financial institutions, who have the capacity to make money from them.

The international players in the distressed debt market, represented by US firms Cerberus and Lonestar, are eyeing Australia because of its legal and regulatory framework which gives property owners certainty.

The firms are specialists in distressed debt investment and know how to revive companies that otherwise may have gone bust, PWC and Blake Dawson say.

Commonwealth Bank of Australia, National Australia Bank, ANZ Banking Group and Westpac have about A$10 billion ($12 billion) of provisions for bad and doubtful debt, and industry experts expect the figure to rise over the next 24 months, the report said.

Similarly, the level of impaired assets at the banks more than doubled to 0.43 per cent of total loans while the number of companies entering voluntary administration in 2008 increased 10 per cent to 8300.

Banks will now be required to keep more capital, equivalent to 25 per cent of non-performing loans.

That means that the more bad debts a bank carries, the less ability it has to lend more money because it would need to increase cash reserves even more to cover the new loans.

At the same time, the businesses that have run into trouble or can't repay their loans on time are less likely to get help from banks that are dealing with more bad debts.

- AAP