To assist the Australian property industry in coping with the effects of the global credit crisis the Federal Government announced on 24 January 2009 the establishment of the $4 billion Australian Business Investment Partnership (ABIP). Media comment on the ABIP has focused heavily on the political machinations of the proposal. This Update conveys some of the lesser publicised details of ABIP with a view to clarifying how Australian developers and investors - large and small - will benefit from the initiative.
Snapshot Of ABIP
- $4 billion temporary fund (Fund) contributed to equally by Federal Government and Australia's four major banks to provide liquidity support to major commercial property projects.
- Fund mandate limited to re-financing existing Australian commercial property syndicated loans where the withdrawal of funding by a pre-existing syndicate member threatens the refinance.
- All loans to be on commercial terms.
- Focus on completed commercial property investments and partly completed development projects.
- March 2009 implementation date.
The key driver for the proposal is Federal Government concern about the withdrawal of foreign lenders from local banking syndicates and the effect it will have on local debt markets accessed by property investors and developers.
The commercial property sector has been specifically targeted because of potential job losses in the industry in the event of further decline.
Governance And Operation
Details of the formal governance and operational structure of the ABIP remain sketchy. The following is however known:
- ABIP will be an equal partnership between the Federal Government and Australia's four major banks;
- Fund to be administered by Federal Government and Australia's four major banks;
- Partnership mandate sufficiently broad to accommodate provision of finance to other areas of commercial lending as required;
- Loans will require unanimous agreement between the Federal Government and the banks;
- 2 year expected lifespan for partnership.
The Federal Government's initial $2 billion contribution will be matched by an equal contribution made by Australia's four major banks, ensuring $4 billion of initial seed capital. ABIP capitalisation may eventually increase to $30 billion via issuance of government guaranteed debt.
Loans will initially be limited to completed commercial property investments and partly completed development projects with secured pre-commitments. The underlying project assets and the income streams must be commercially sound. Concrete examples given include:
- retail shopping centres;
- commercial office towers;
- factories under construction; and
- industrial property.
Fundamentally, the project must be considered a viable construction or commercial property project to qualify for ABIP assistance.
Residential development projects are a notable exclusion, however the proposed $6.6 billion initiative to construct 20,000 public sector housing separately announced by the government in some way counters this exclusion.
Lending Criteria And Terms
Very little is currently known about the lending criteria and terms for ABIP loans. The following has however been confirmed:
- ABIP loans will be limited to projects for which:
- there is an existing lending syndicate comprising Australian and/or foreign banks; and
- as part of refinance negotiations one of the syndicate members has decided to exit.
- All loans will be made on fully commercial terms.
- Loans will be subject to safeguards to ensure banks continue to finance ABIP supported projects.
Some of the big unknowns include:
- Security ABIP will get for its loans;
- Priority of ABIP relative to continuing syndicate members;
- Covenants required from continuing syndicate members to safeguard ABIP loan;
- Must a valuation precede an ABIP loan?
- Must a syndicate involve a foreign bank and will only a foreign bank exit trigger an entitlement to an ABIP loan;
- Quantum threshold (if any) on value of exiting syndicate member's loan;
- Must an Australian bank be part of the continuing lending syndicate; and
- What happens to loan in 2 years when ABIP ceases.
Benefits For Small To Mid-Market Participants
Small to mid-market developers and investors are unlikely to directly benefit from the scheme (at least in its current form) by qualifying for an ABIP loan. The requirement for an existing lending syndicate, the focus on 'major' commercial projects and the involvement of Australia's four major banks, all point towards a very 'big end of town' focus.
The Federal Government would nevertheless argue that small to mid-market developers and investors will indirectly benefit from the scheme. By underpinning the capital market for large commercial operators, the ability of smaller participants to access debt at reasonable prices will arguably be enhanced. Moreover, as service providers to the commercial property sector, the government would argue that small to mid market participants will benefit from continued demand and less restrictive credit conditions generally.
It remains to be seen how quickly small to mid-market participants will reap the indirect benefits of the proposal and how much of the liberated capital will be offered to small to mid market developers and investors over other industry groups.
Benefits For Larger Participants
The initiative seems to be a positive thing for larger developers and investors. Provided they have a viable commercial project either in their portfolio or pipeline, the implications of unsuccessfully refinancing using conventional bank sources will potentially be ameliorated by an ABIP loan. Securing an ABIP loan will no doubt be a challenging process, but the prospect of obtaining such a loan should be extremely valuable.
Even if a larger participant fails to obtain an ABIP loan, the mere fact that $4 - $30 billion in capital is to be injected into the Australian debt market over the next 2 years should enhance debt capital that is available for non-ABIP qualifying property projects.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.