Australia: The Good, the Bad and the Ugly – Australian banking

From Red to Black 2016
Last Updated: 17 November 2016
Most Read Contributor in Australia, November 2017

The Ugly

Bankers and guarantees

Who would be a banker? In both Doggett1 , and Rose2 , the Victorian Supreme Court and Court of Appeal allowed guarantors without "special disadvantages" to avoid business guarantees. Both Courts reasoned that the Code of Banking Conduct requires bankers to "prominently" make the guarantor aware they may become responsible for paying a guaranteed debt. Merely placing a warning to this effect in big bold letters on the document is not always enough, even for an experienced businessman "perfectly capable of protecting his own interests".

A cultural change

The Code, for the present anyway, has been judicially construed to place a greater emphasis on a values-based approach to bank dealings with customers. Placing the customer first, even a customer in financial default, mirrors, in many ways, the present leading trading bank approaches to customer dealings in default situations. The emphasis within the trading banks, and on advisers, is to look for customer-focused solutions that provide the customer further chances to resolve its own situation. This is variously presented as forming part of the banking culture to "put the customer first" or as being defensive in nature, as protecting the brand.

Restatements rather than forbearances

In the immediate aftermath of the GFC, when the "mark to market" values of many businesses or their key assets were uncertain, financial institutions often entered into forbearance arrangements, providing time for the market to settle or for the customer to find another solution (typically involving a sale if the customer could not refinance).

Marking a new approach, banks now typically restate the terms of loans, for example, amortising repayment obligations, changing interest or asset or market value coverage ratios, waiving default interest and other charges, altering security rights or compromising (forgiving) part or all of the loan. Restated loans allow customers time to search out solutions to restore financial non-performance - or put off today a problem for tomorrow. The paradigm industry example is the rural sector where banks are generally wary of enforcement against defaulting farmers.

It remains to be seen whether a decision to extend farming loan maturities to better seasons, to introduce further funding for fertilisers or more productive equipment is in the long-term interests of defaulting rural customers. For the moment, though, the willingness to reset loans to provide another opportunity for the customer to succeed, or fail more harshly, means that instead of forbearances, banks are more willing to restate or novate loan arrangements.

Noticeably, trading banks are taking similar positions in relation to exposures in mining services and related industry credits.

Of course, new lends look for credit quality. While farmers, mining services, retail and the like within the banking system can expect, for now, to see a greater willingness to negotiate rather than enforce on defaulting positions, new customers are finding new credit hard to come by from trading banks. With, perhaps, one exception: retail property.

When APRA changed the capital rules in 2015 to encourage banks to place more capital with business than residential property, it did so to reduce bubbles forming in particular residential assets. The dual impact of IFRS 9 and Basel III may undo that good work, encouraging banks to move risk capital away from pricier corporate lending and into retail or consumer property credits. This will not amuse the two Australian trading banks who hold books with full property spreads, nor property developers not considered to be "tier one" credits. The former cannot lend more into investment or commercial property, the latter cannot attract debt capital from the trading banks, no matter how supported the project with presale or agreement for lease commitments. Something will need to give - hopefully, not integrity.

The Bad

Playing by the Rules

Then again, who would not be a credit restructuring banker?

The London Rules are equally applicable in Australia as they are in an international situation - maintain information flows to the banking team, reduce surprises, be transparent and the restructuring might stand a chance. Play by the rules and as Atlas Iron and NRW (so far) and various other savings show, bankers are supportive of restructurings run with the help of banktrusted external advisers. In this regard, Australia is following the lead of international banks in supporting credits executing on a restructuring plan agreed with all stakeholders. This is the new paradigm - early engagement with broad stakeholders when faced with liquidity issues.

Moreover, the restatement of loan positions can be compelling in terms of bank capital requirements.

IFRS 9 and Basel III

Restatements of arrangements between the bank and defaulting or near defaulting customers may also reduce capital cover requirements for impairments - under the "expected loss" model, financiers must record credit losses that have already occurred and losses that are expected in the future (IFRS 9). The rule is designed to help ensure banks maintain appropriate balance sheet capitalisation for potential impairments.

According to guidance issued in January 2015, "where renegotiations [of credit arrangements with the customer] have been undertaken, banks must be able to demonstrate whether the renegotiated asset has "improved or restored" the ability to collect interest and principal - and reflect credit losses accordingly".

While classification and principle-based rules look at credit deterioration histories, and measure both individual and market events, impairments are usually taken according to cash flow characteristics and according to the business model of the underlying credit.

A restated facility based on credible commercial-based expectations of returns on better seasonal conditions, changes in the macro landscape, sometimes involving debt deferrals, compromises or reallocations against specific assets (eg. in the case of rural arrangements, limiting security to the sale of water rights rather than to the underlying farming enterprise) can permit credit enhancement.

In the right case, a restatement of facility can accordingly improve the bank's balance sheet. At the very least, a restatement of facility allows the bank to encourage a customer into focusing on its own solutions, typically involving refinancings, asset sales, capital raisings or the engagement of restructuring advisers.

By the same token, since March 2015, when the Reserve Bank released its warning of a coming oversupply of apartments in inner Melbourne (and other centres) and APRA began a program tightening lending to investors and foreign buyers, both investors and commercial property developers with exposures to settlement risk in the settlement of apartments, have found it harder to attract finance. It remains to be seen whether banks would be forced, under IFRS 9 categorisations, to restate the credit risk of existing property developer credits on their books. This remains a possibility.

Meantime, as capital searches out new lending opportunities, owner occupier lending has increased by about 18% over 2015 figures (total residential lending increased by about 4% in the same period, itself indicative of the reducing appetite in financial institutional lending to investors and foreign buyers). While this may be a better allocation of capital within the property sector from a credit risk point of view, it suggests we are still yet to see a successful reallocation of capital from residential to business.

The Good — The Rise of Restructuring

Who would not be a company exposed to international markets? Australian banks are removing the shackles of the "reset and forget" forbearance in place of refinancings. Singaporean, Japanese and most Asia based banks are supportive of anything that does not cause added risk. Noteholders are accepting the need to restate longer term instrument maturities in exchange for better coupon, security, easier default covenants and, increasingly, cash-backed interest reserve accounts. There is plenty of money offshore.

A company under financial distress should be encouraged by the bipartisan approach of politicians at the federal level favouring amendments to the Corporations Act to introduce "safe harbour" protections to directors engaging with turnaround advisers to devise and implement restructuring plans. The earlier the engagement, the more likely the advisory team will be able to deal with short-term viability and immediate funding needs before working on both balance sheet as well as P+L stresses in the company.

Best of all, who would not be playing treasury in a smart well-run company like Fortescue Metals Group? Take unsecured near term bonds and replace these with secured longer term bonds, then use the market confusion to buy back even shorter term higher priced bonds at discount! The long play is to reduce the average cost of financing at a time when reducing the average cost of everything makes FMG one of the best iron ore producers in the world.

Stay tuned

Earlier this year we were involved in a proceeding commenced in the Supreme Court of Western Australia by Hamersley Iron against Forge Group (in liquidation and with receivers appointed), in which we acted on behalf of Forge's receivers and managers. In that proceeding, Hamersley argued that it was entitled, under the Corporations Act (section 553C, because Forge was in liquidation), to set off all moneys it owed to Forge under various construction contracts (circa $100m) against all moneys owed to it by Forge (circa $150m-$200m) for not completing those contracts, in circumstances where Hamersley terminated the contracts shortly after the appointment of the receivers and took approximately $100m in security bonds.

To complicate things further, Forge had charged its rights under those contracts in favour of the ANZ, which were now governed by the Personal Property and Securities Act. The issues for determination by Justice Tottle included the scope of set-off under section 553C of the Corporations Act, whether the ANZ security destroyed the requisite mutuality for section 553C set-off, the nature of a security interest under the PPSA and whether it is fixed or floating in nature and the application of statutory and equitable set-off in an insolvency situation where section 553C applies.

Justice Tottle is yet to hand down his decision (we anticipate it will be late 2016 to mid-2017). The ramifications of the decision will likely significantly affect the way lenders structure their security arrangements particularly in the construction sector, having regard to how the Court views the relative strengths and weaknesses of a PPSA security interest in an insolvency situation.

Footnotes

1 Doggett v Commonwealth Bank of Australia [2015] VSCA 351

2 National Australia Bank Ltd v Rose [2016] VSCA 169

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions