Record levels of equity raised to ward off crisis

SYDNEY - Corporate Australia has raised a record amount of equity this year as businesses looked to alternative sources of funds in response to the global financial crisis, a senior Reserve Bank of Australia official (RBA) says.

The RBA's head of domestic markets department John Broadbent says leverage in the corporate sector has been declining, with intermediated debt being replaced by a big increase in equity raisings.

"Listed corporates have raised a record amount of equity this year, totalling some A$60 billion ($75.3 billion), with issues broadly based across all sectors," Broadbent said yesterday. "This compares with an annual average of around A$20 billion in the three years prior to the financial crisis."

Broadbent said most of these equity raisings had been used to pay down debt, with some companies explicitly saying the funds raised were to repay bank loans.

"These substitutions have contributed to the decline in business credit over 2009," Broadbent said at the Corporate Finance World Australia conference in Sydney in a speech entitled "Reconnecting corporate Australia with frozen credit markets".

The past two years had also seen a change in the composition of debt funding as businesses looked to the bond market as strains on financial markets eased through 2009, Broadbent said.

"This is a relatively recent development, however," he said. "As markets have thawed as investor demand for investment-grade paper has returned, gross issuance has resumed, though spreads remain well above the levels seen prior to the financial turmoil.

"Corporate bonds outstanding have risen by over 10 per cent since mid-2007 to total A$150 billion."

Smaller companies, which do not have access to funding such as the corporate bond market, have had to go to the bank.

"Bank credit has continued to flow to this sector, with the fall-off in total business credit since the end of last year being mainly associated with lending to larger businesses," Broadbent said.

"Outstandings to smaller entities have risen at an annualised rate of around 5 per cent over the past six months, and is about 10 per cent higher than its level in mid-2007, prior to the onset of the financial crisis."

Broadbent said the reduction of leverage by corporates had resulted in gearing ratios falling about 20 percentage points to around 65 per cent, close to historical averages.

He said the tighter lending criteria among the banks have acted as a significant constraint upon some businesses, "especially real estate and infrastructure".

But he said firms had been able to get access to the funds they needed.

"For the most part, however, firms have been able to refinance as needed, and it has been firms desire to reduce leverage against the background of an uncertain economic outlook that has lead to a reduction in the demand for credit," Broadbent said.

- AAP