Debt is no longer a dirty word for Australia’s big businesses

Australian businesses are increasingly tapping lines of credit to fund offshore growth.

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Australian businesses are starting to borrow again – in a big way. Debt is no longer a dirty word and for many, a meeting with the bank has become the first stop in funding an expansion spree.

WiseTech has become the latest to put it all on the credit card, taking a monster $3bn debt facility to fully fund the entire buyout of US logistics software play e2open.

In recent weeks, Woodside issued a $US3.5bn big bond in US markets to help fund its Louisiana LNG development. Woodside’s debt has jumped to $US7.7bn ($11.8bn) putting its gearing to the top end of its targeted range.

In WiseTech’s case, it’s gone with a line-up of existing banks and several new ones to lock in a new debt facility of up to five years.

“This provides funding and cost certainty,” WiseTech’s chief financial officer Caroline Pham says.

In recent weeks, agri-operator Ridley increased its debt facility from its banks ANZ and Westpac to help buy Incitec. Even smart warehouse player Goodman Group, a highly cautious player when it comes to debt, has seen its gearing level shift up to nearly 17 per cent, the highest level in years. Goodman recently used its high share price to tap investors for $4bn, to help pay down some of its debt. However, Goodman has an ambitious data centre development slate ahead, so it will need to run ahead the level of borrowings that it is normally comfortable with. Miner Rio Tinto has seen its debt drift up as it funds a lithium expansion, while at the smaller end of the scale, Cleanaway used debt to fund its near $400m buyout of Contract.

WiseTech will borrow $3bn to fund its US expansion of a port logistics operator. Picture: Getty Images

The rush back to borrowings suggests two things. First and most importantly, companies are comfortable that interest rates have well and truly peaked for this cycle. Australia’s Reserve Bank is now shifting to a dovish footing with a number of rate cuts expected this year. The longer-term bond rates that most lending facilities are calculated off are much lower than a year ago.

Even in the US as Donald Trump continues to cast a shadow over trade and the economy, the Federal Reserve is still expected to deliver at least one cut in the second half of this year. And that follows three cuts last year, including 50 basis points in September.

The second issue is companies have spent the period since the Covid pandemic getting their balance sheets in shape to where they are now in a position to comfortably borrow again. After navigating the pandemic shock to the inflation shock and then a slowdown, companies are reasonably confident about the outlook that even with a choppy global economy they can handle whatever is thrown at them again.

Across the S&P/ASX 200 the average net debt to earnings ratio (or leverage ratio) is starting to drift up to 3.52 times from the low of 2.58 times at the end of 2022. Shortly before the Covid pandemic, leverage was tracking between 6 to 7 times.

There’s another important factor that has changed the view around debt in recent years. That’s the rise of private credit, with hundreds of billions flowing into funding vehicles now looking for a home.

Australia’s big super funds are directing more cash into private credit, with global managers like BlackRock, Blackstone and Apollo, and even Australia’s Macquarie, competing to allocate more funds in what is still a subdued M&A market.

This is pushing down yields, making debt more competitive against using equity, even with shares tracking near record highs.

Borrowing is back, but it is still early days. When the term “lazy balance sheet” starts getting thrown around by investors, the boom will be in full swing.

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