The impact of syndicated loans on the development of Australia’s corporate bond market

Over the period from 1996 to 2010, competition to provide corporate and institutional banking services in Australia substantially increased, with a large number of international banks entering the domestic market. This development is consistent with the long standing desire of policy makers to increase competition within the banking system, rather than a focus on introducing alternative sources of competition, such as a corporate bond market. Nevertheless, the four major Australian banks have tended to dominate the lead arranger league tables for arranging both non-government bonds issues and syndicated banking facilities. The influx of international banks into the domestic market over the period provoked a competitive response from the incumbent banks by increasing their relationship banking activities. This involved increased relationship lending, in the form of syndicated loans to the corporate sector and ensuring a steady supply of high quality non-government bonds to institutional investor clients. As a result, Australia has a developed and liquid non-government bond market but corporate issuers have been limited. This thesis finds that competition to provide syndicated loans has relied on borrower perception of a competitively priced product and providing large amounts of debt, without the need for the borrower to have a credit rating, to attract a clientele. This finding is contrary to theoretical predictions that company financial characteristics will determine a choice between the borrowing from a bank or issuing a bond. Competition in the syndicated loan market has inhibited the development of the Australian corporate bond market even though the cost of debt is found on average to be lower in the corporate bond market. It is found that the major banks achieved dominance of the syndicated loan market through operational efficiency that allowed credit spreads on syndicated loans to be reduced. However, syndicated loans were not priced as loss leaders and evidence is found of bank-reliant borrowers being held-up by their syndicated lenders. Overall, a symbiotic relationship appears to exist between banks and the debt market in Australia, in which the behaviours of competition, complementarity and co-evolution are exhibited. To develop the corporate bond market the challenge is to attract companies; to position the market as viable source of term debt funding, just as the larger non-government bond market is. It is recommended that companies actively seek alternative term debt funding options or at least improve their bargaining position by holding a credit rating. It is also recommended that policy makers encourage competitive alternatives to the banking system for the provision of term debt funding to large Australian companies. A competitive advantage of well-developed corporate bond markets is the ability to provide longer term funding than that provided by the banking system. Accordingly, it is recommended that the risk free yield curve be extended beyond the current 15 years to promote longer term corporate bond issuance.