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Borrowing in a Post GFC World

20 August 2013

Whilst the causes of the Global Financial Crisis are complex and technical, the impact of the GFC on the availability of finance was clear and dramatic. The effective freezing of global financial markets and the associated liquidity crisis forced banks to reassess their lending criteria and practices.  The availability of finance for property development ceased to exist.  Other sectors such as hospitality also suffered greatly as banks managed their exposures and repriced risk. 

Many borrowers were hit with loan-to-value ratio breaches as property values fell - often requiring large sums of principal to be repaid on short notice.  Borrowers suffered sharp increases in interest rates.  Prior to the GFC, some borrowers were paying interest rates as low as 0.7% above the Bank Bill Swap Rate (generally regarded as a bank's 'cost of funds').  Interest rate margins and the relevant base rates skyrocketed.  Borrowers were rudely introduced to concepts of "market disruption clauses", "increased costs clauses" and "treasury margins" as banks looked to cover their costs and reprice loans based on revised risk assessments.  The lack of refinancing options meant that borrowers were forced to accept these conditions.  

The ability of the banks to implement these measures came as a surprise to many borrowers.  Whilst most of these rights were standard provisions in many commercial loan documents they have seldom been relied upon by the banks.  The easy money of the pre-GFC era led many borrowers to sign loan documents without scrutiny in the belief that refinancing would be readily available if the relationship soured.

Five years on from the worst of the GFC, balance is returning to the banking landscape.  The commercial reality of needing to lend money to make money has seen the banks reengage with business borrowers.  The relaxation of credit has seen healthy competition return to most sectors of the market. 

For "good" borrowers there are now opportunities to negotiate better pricing and relaxed loan covenants with their preferred bankers.  However, in order to extract the best possible deal it is important for borrowers to be well advised on current market practice.  Likewise, it is critical that borrowers understand how loan covenants may impact upon or restrict their business.  It is preferable to negotiate these arrangements at the outset.  

We are highly experienced in reviewing and negotiating loan documents on behalf of borrowers and have very good working relationships with all major banks.  Even if your bank may not be prepared to negotiate loan terms, it is important to be fully informed of any restrictions contained in the loan documents that may impact on your planned business operations.

For more information contact:

Michael Hobson | Senior Associate
Mullins Lawyers
t +61 7 3224 0380
f +61 7 3224 0333
mhobson@mullinslaw.com.au

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