Funding in the year ahead
Banking Prudential Requirements come into effect
From 1 July 2022, locally incorporated banks will need to hold more capital against their risk weighted assets to comply with the Reserve Bank’s Banking Prudential Requirements. These requirements were meant to start in 2020 but were delayed in order to give the banks headroom to respond to the Pandemic. The requirements have essentially forced New Zealand banks to curb riskier exposures and improve their balance sheets (through divesting non-core assets, issuing more equity and/or reducing dividends).
Growth in sustainable finance products
Banks will continue to expand and increase their use of sustainable finance products as they play a leading part in promoting sustainability and environmental, social, and governance (ESG) principles. As demand grows (or borrowers are forced), more financiers and financial services firms will accelerate their speed to market for ESG products and services, such as green and social bonds, sustainability linked loans and new products seen in Europe, such as current accounts with sustainability and carbon-tracking features. There are calls for ESG regulations to be implemented to reduce the potential for greenwashing and to create opportunities for genuine products and innovative ESG service providers.
Rise in distressed financings
We expect to see more distressed financings in 2022 (off an albeit low base) as some borrowers simply won’t be able to meet increasing interest costs, encounter supply chain issues and/or the struggle with continued effects of the Pandemic. However, given the number of cashed up private capital investors, private equity sponsors and alternative financiers providing flexible capital solutions throughout the capital structure, we expect many distressed financings will find a solution (for example, through restructurings) without being tipped into liquidation.
Competitive M&A financing landscape
We expect banks to compete strongly for proven borrowers, sponsors and industries. Given increased regulation in consumer and small trade finance, they may look to increase their lending to larger businesses, which is positive for leveraged M&A financings. They will continue to face competition from credit funds and non-bank institutions in the debt market, particularly as the high debt multiples are sought.