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A specialist finance provider has predicted commercial brokers will increasingly need to turn to non-bank lenders, as COVID support fades away and interest rates climb.
Speaking in a panel discussion hosted by Semper, Nicholas Samios, director of specialist SME finance provider Hermes Capital Partners, reflected on the state of business lending and the rise of zombie companies – firms that would otherwise be unviable and manage to survive by taking out more debt.
He believes commercial brokers’ relationships with non-bank lenders will become more significant, as companies are about to come out of the support packages extended through COVID.
Mr Samios’ primary business is in corporate restructuring, turnarounds and recapitalisation – businesses in rough periods.
But the company has never been in a slower period than the last couple of years, he said.
“The reason we’ve seen that is that the government has flooded us with handouts, [JobKeeper]. The banks have been giving moratoriums. So companies are flush,” he said.
“In the latest data I looked at, there’s $270 billion sitting on balance sheets, for both the people and businesses. And so this has manifested itself in zombie companies.”
Businesses that would have normally collapsed have been propped up by support through COVID, Mr Samios said, noting insolvencies have been roughly halved.
But there are opportunities for brokers, he further explained, who serve the companies downstream of a zombie firm, whether it’s a subcontractor or supplier.
“Brokers should have this expectation that there are some companies that are like a patient on life support and the family has decided do no resuscitate. So then your customers continue to trade with these businesses and when the crunch comes, they’re suffering from credit losses,” he said.
“So your customers are going to suffer credit impairment as a result, either because their financials are going to reflect the fact that they suffered losses, they’re going to fall into arrears with their statute impairments and they’re going to suffer issues.”
Such firms that will end up being short on cash and will go to brokers seeking cash and redraw facilities, Mr Samios said.
“You probably won’t be able to go to the bank because the bank is seeing impairment, so you’re going to have to rely on your non-bank connections,” he commented.
Inflation is steadily rising, which could bring forward when the RBA lifts the cash rate from its current record low level of 0.1 per cent.
Brokers’ relationships with the non-banks will be key, Mr Samios said, forecasting the banks will constrain their lending as rates pick up.
“I think [the inflation uptick is] going to advance interest rates. When interest rates go up, banks become a lot more cautious,” Mr Samios said.
“One of the reasons the banks are the way they are now, I know that a lot of brokers have opportunities but they are actually nursing clients and that’s because interest rates are so low and they can afford to hold on to exposures that they otherwise would not want.
“So when interest rates start going up, we’re going to see the banks looking to push exposure sheets and I think they’re going to get tighter with their lending.”
Look out for the tax collector
Nick Harper, director and private funding specialist from Fuzion Capital stated the Australian Tax Office (ATO) will begin to crack down on businesses about outstanding payments, after two years of radio silence.
A window could open for brokers, from businesses that aren’t prepared.
“What you’re going to find now is the ATO is going to start chasing you for your GST, they’re going to start chasing for your tax, they’re going to chase you for your outstanding amounts, they’re going to start trying to get you to pay it on time, because the last two years, they haven’t done. But that’s already started,” Mr Harper said.
“I think that’s going to be one of the opportunities that brokers should start to look at is find out who’s going to be taking tax bills come July, August and your client doesn’t have the money because they’ve been spending it on other things.”
Mr Samios echoed Mr Harper, warning the ATO will come out in the months after the election with a “baseball bat”.
He also expects more projects will be green-lit post-election, opening more opportunities to brokers.
[Related: Plenti loan book exceeds $1.25bn]
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