To say it is an interesting time for credit markets is an understatement. Business and housing credit appetite has been strong across the banking and private lending sectors with many financiers we speak to stating they can’t keep up with demand. Asset prices have also been increasing strongly, unemployment is down and there have been positive signs that we are entering into a solid period of growth.

But there are cracks emerging.  

• Inflation has raised its head again and this time it is supply led, which is incredibly difficult to contain.

• Raising interest rates is not going to reduce the cost of oil or beef but rates will increase nonetheless, although some say perhaps not as quickly as they may have done before the Ukraine conflict.

• Many businesses are now having to contend with rising costs, particularly fuel, which is also impacting the household sector.  

• We have seen a couple of high profile building companies collapse in Brisbane and the floods is going to add to the distress in this sector.  

• On top of all that it appears China’s economy is being increasingly impacted by another outbreak of COVID with their share market under significant pressure.

‍

We have seen 3 month BBSW, the benchmark rate a lot of our clients debt is based off, increase from 0.08% 2 weeks ago to 0.15% today and it is likely to increase in line with rates but also market risk sentiment. The question is - what is going to happen with credit margins?

Credit margins are directly impacted by the riskiness of a business and its operating conditions. During the GFC we saw credit margins increase significantly, although they tended to settle down within the following couple of years, albeit at higher levels. The risk for our clients is that financiers will seek to increase credit margins due to increased business uncertainty.

‍

So what do we recommend?

If you are planning to invest in your business over the next couple of years then perhaps now is a good time to get the appropriate facilities in place. And if you have facilities due to mature in the next 12 months it may be worthwhile looking to extend the maturity date of those facilities now.  

You may not be able to control interest rates but you can take action to secure your credit margin and this, combined with an effective interest rate hedging strategy, may assist you with managing what is going to be an interesting period over the next couple of years.

We’re here to help – contact our team at Balanz to discuss your best options.