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High-end financiers spread their wings

By Nick Stride

Friday 28th May 2004

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The big end of the banking market ­ companies with more than $100 million of revenue ­ continues to shrink and bankers are having to cast their nets wider to maintain business levels.

John Fairfax' purchase of Independent Newspapers' publishing business, Telstra's purchase of Clear Communications, Carter Holt Harvey's sale of its tissues division, and the sale of the Central North Island Forests to a Harvard fund all shifted debt financing from New Zealand to offshore banks.

In the past 24 months, estimates BNZ general manager of corporate and institutional banking Anthony Grayson, there have been maybe 20 examples of "corporate shrinkage."

That shrinkage has been exacerbated as far as banks are concerned by the trend to raise debt finance directly from local investors, or in offshore markets.

Meridian Energy, Powerco, Contact Energy and Fonterra, for example, have all raised cash in the US private placement market.

But that business, Grayson notes, isn't lost entirely to the local banks.

"We have strategic alliances ­ ourselves with Royal Bank of Scotland and Westpac with Bank of America. And they (corporates) swap US interest rate and currency risk back into New Zealand dollars. We do that."

For those able to access the US market, funding costs are lower, although companies need to borrow at least $200 million to make the exercise viable.

The local banks, says Grayson, are just as sophisticated as those offshore, but are generally far smaller and so unable to gather large concentrations of risk.

To some extent, he says, the appetite for US dollar debt is reliant on a well-performing sharemarket. If Wall Street falls, next year Europe or Japan could be the debt market of preference.

Much of the activity in the corporate market, notes director designate of ANZ and National Bank corporate banking Jeff Greenslade, is driven by mergers and acquisitions.

The last year had a quiet start "but they're beginning to pop out of the woodwork now."

Bankers can at least take comfort that, of the five current takeover offers, only one ­ SEA's offer for Trans Tasman Properties ­ involves an offshore bidder.

And a number of big companies have aggressive expansion plans.

"The big dynamic we see in our business," says BNZ's Grayson, "is New Zealand companies such as The Warehouse, Waste Management and Sky City Entertainment growing into Australia. We now have 70 transtasman clients and that has probably doubled in three years."

That growth, in both directions, has driven increased activity in currency markets, to the banks' benefit.

Another source of growth, adds BNZ institutional foreign exchange manager Mike Symonds, is a "drift up" of smaller companies using services offered by the banks' corporate arms, particularly risk management advice.

Banks also see the nationwide need for infrastructure spending as a big opportunity but it seems unlikely to become a significant feature of the market in the near future.

"In other markets, there's a big private sector involvement," Westpac Institutional Bank general manager David McLean says. "Here there is big pent-up demand for spending on roading, transport, water, waste water and energy."

But despite legislation enabling public-private projects, it's still relatively difficult to get things going, he says.

The Resource Management Act might also be contributing to a reluctance to get involved.

"The key issue is risk and reward. There's a nervousness that private sector financiers will make a lot of money without bearing much risk."

The government, McLean says, can justify underwriting such projects because, without private sector involvement, it will have in any case to spend the money sometime in the future.

The issue is one that will have to be addressed.

"There's tremendous expertise available to Australian-
based banks, but there is not a willingness by project sponsors to get that engagement."

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