Bank regulation in Australia is solid and we have a mature bond market but the recent collapses of Credit Suisse, Silicon Valley Bank and others, will reach our market and project managers will need to look for innovative alternative funding sources.
By Jacquelene Pearson*
The recent Silvergate, Signature and the Silicon Valley Bank (SVB) collapses in the United States of America (USA) were easy to blame on their exposures to crypto currency and technology speculators. The US Federal Reserve and the White House told the world not to panic, even though the Signature and SVB collapses were two of the biggest in American banking history (ever, not just since the Global Financial Crisis).
By mid-March, 11 major US banks had put together a $30 billion rescue package to protect the First Republic bank from collapse. Various other American banks had borrowed around $150 billion from the Federal Reserve’s liquidity facility to avoid a capital reserve crunch.
Then Credit Suisse (CS) put its hand up. Switzerland’s second biggest lender’s share price crashed after one of its principal supporters, the Saudi Nation Bank, said it was not prepared to put any more funds into CS having already attained 10% of the bank last year at a cost of $1.5 billion.
The troubles at CS suddenly meant an American regional banking crisis was a global banking crisis. CS secured a 50 billion Swiss Francs lifeline from the Swiss National Bank which gave it some time to get out of trouble. The Swiss Government then brokered a deal for the nation’s biggest bank, UBS, to take over its biggest competitor, CS, for around US$3.25 billion – its market value halved in two days.
In the aftermath of the secretly negotiated UBS takeover, Reuters reported that CS had been battling a crisis of confidence of its own making for months, after years of scandals and losses. Reuters reporters argued that the UBS takeover broke one of the golden lessons out of the GFC by concentrating even more capital in a single global banking behemoth – UBS.
Many commentators and analysts are arguing this crisis in international banking is far from over.
Reuters also speculated that pressure from European regulators and the Saudis had pushed the CS rescuers in Switzerland to turn another long-held golden rule of global banking on its head – “In the end, the Swiss agreed, choosing to wipe out 16 billion of francs of bonds, compensating shareholders with 3 billion francs and turning a key principle of bank funding on its head – namely, that shareholders rather than bondholders take the first hit from a bank failure,” Reuters reported.
The impact of this crisis on bond markets around the world will be one of the most troubling factors for lenders, borrowers and investors. Let’s go back to the US situation for a moment. Prior to the recent run of bank failures, many banks had been investing their reserves in US Treasury Securities (bonds) which had been paying very low interest rates.
Then the Federal Reserve started to increase the official cash rate to bring escalating inflation under control. As rates went up, bond prices went down and the market value of bank capital reserves followed. Forced to shore up their capital reserves, some banks started selling bonds at substantial losses.
The greatest pain from the unravelling of the international banking system will be felt in smaller economies, where bond markets are less mature. The greatest repercussions will be felt by those who have used bonds to raise funds for major projects. If those bonds have been backed by any of the crisis-hit banks, such as Credit Suisse, their value will have disintegrated.
Investors in riskier types of Credit Suisse bonds had the value of those bonds slashed to zero on the Sunday of the UBS takeover. If the value of your investments is suddenly reduced to zero, any projects you are backing must come to a complete standstill.
In countries where financial regulations are still developing, it is not possible for the authorities to take action against the bondholders or banks backing the bonds. They are left with no option but to take action against the developers and project managers who’ve put their faith in a supposedly “too big to fail” reputable global bank.
Australia does have a mature bond market and well capitalised banks but our banks are not immune from the combination of crushingly-high domestic inflation with rising interest rates. Our banks, big and small, will be watching the behaviour of the US Federal Reserve and the outcomes of the UBS takeover of Credit Suisse.
Lending practices may tighten, particularly for borrowers working on cross-border projects in countries with less mature bond markets, for instance.
The key to successful investing, borrowing, lending and project management is liquidity or cashflow. It is essential to have access to enough cash or highly disposable assets to keep the wheels of any project turning. Without cash you cannot pay for your supplies, your labour, for anything.
A long-held expectation of investors and borrowers is that banks who make funds available via loans or bonds will be able to honour those “products” with cash when needed by their borrowers or investors. We have learned in recent weeks that, even with the reforms to the banking system put in place after the Global Financial Crisis, not even a global bank like Credit Suisse is immune from the consequences of a lack of market confidence.
A bank may have a big name and branches all over the world, but its bonds can become worthless overnight. CS bonds were not insured or guaranteed and that is a very big lesson to learn when you are relatively new to using bonds.
Fortunately, there is a new wave of innovators or disruptors, including Acuity Funding, who combine the best of investing and lending to arrange funding for even the world’s biggest projects. You could say such disruptors are a safer bet than many banks at the moment, including Australian banks.
A conventional lender, such as a bank, can lend money for a project in return for security, such as a lien over a piece of real estate or property. The limitation of this type of funding is that the lender only has a set amount of money available to lend.
Investors, on the other hand, can make funds available for a particular project, but they usually have quotas or caps on the amount that they can invest in any individual project or any particular type of project. This is due to the fact that they usually invest in accordance with a particular mandate or asset allocation or profile/mix.
And when your project is dependent on either a lender or an investor who suddenly experiences a capital or liquidity crisis, your source of funding can dry up, completely and without warning.
The repercussions are obvious. If your project is to deliver major infrastructure for a national government with stringent timeframes and deadlines, you are in the firing line, not your investors or your lender.
Acuity Funding is an innovative funding arranger that combines the best features of sourcing funds from lenders and investors. We have investors who come to us and we convert their “investing” funds into “lending” funds – without finite funding caps and without quotas. We offer the best of both worlds.
We offer our investors security backed with real estate. We are lending their money out so they are guaranteed a return in the form of interest, not profit.
If Acuity Funding offers a bond, it is completely insured so the return is guaranteed.
Acuity Funding is already successfully rescuing project managers and developers in the Asia Pacific region who have been caught up in the banking crisis through their dependence on bonds that have been bank-backed and not guaranteed or insured.
If the current banking crisis continues to cause market instability, and if there are more collapses or bailouts needed, investors and borrowers will both need to find alternatives. Acuity Funding has already successfully married lending and investing, giving investors and borrowers the best of both worlds.
We have over 40 years of experience as funding arrangers. Our funding sources include private investors, hedge funds, sovereign funds and family offices seeking safe returns. They trust Acuity to arrange funding for major projects including public-private-partnerships, major infrastructure, education, health, energy and agricultural projects.
Our investors know we are an established cross-border funding arranger. Our borrowers can be assured that because our products are 100% insured the funds will be available until their project is complete.
If your project, funding or investments have been impacted by the global bank contagion, contact Acuity Funding to start working on a solution.
*Jacquelene Pearson is Acuity Funding’s content editor