Royal Commission Impacts
There is much debate in the industry about the impact the Royal Commission into Banking will have on the future availability of Credit and the types of funding structures available in the future.
There will be pain…but where?
There is no doubt that the Royal Commission will tighten the availability of credit….however banks are in the business of lending money so how will they reconcile that conundrum?
Firstly industries such as Property Development will go the way of most other industries, in that you get big or you get out. Unfortunately the small to medium developers will be hardest hit in terms of senior debt funding availability, on terms that they can work with. LVR’s will tighten dramatically which will mean more equity funding is required. This in turn will limit the amount of work those small to medium developers can undertake unless they can source third party equity or mezzanine style funding. Of course that funding comes at a price and a level of risk.
The major banks are also aware of this risk and whilst they may have a comfortable first mortgage position, another factor to come out of the Royal Commission is that banks will be loath to move in and liquidate small or medium enterprises for fear of the poor publicity.
So…What will happen, and in fact what we are already seeing, is the major banks tightening up on their lending criteria, but forming relationships with private equity funds and mezzanine lenders to provide the full funding package. These loan structures will be increasingly put together by brokers who sit outside the main banking system as the majors will not be seen to be structuring high risk debt.
Having said all that, overall Credit will become far more difficult to find for all, and the smaller your balance sheet the lower your chances of finding it. Small and medium sized property developers may well go the way of the old corner store….a nice memory of what used to be.
John Rosel