Aggressive lender shootout for the upper hand poses a risk for Australia’s market: Ashurst

There are risks that ‘lender-on-lender violence’, a tactical tussle between banks and other credit providers, becomes more prevalent in Australia as the global private credit market swells.

News reports have JPMorgan forging a partnership with Cliffwater, FS Investments and Shenkman Capital Management as a way of pushing into private credit and direct lending. Picture: AFP

There are risks that so-called lender-on-lender violence, a tactical tussle between banks and other credit providers, becomes more prevalent in Australia as the $US2 trillion ($3 trillion) global private credit market continues to swell.

That’s the view of Ashurst’s global banking co-chairs Lee Doyle and Nicholas Mavrakis, who identify lender-on-lender violence as a hot topic in the US, and note that banks in Europe and other parts of the world are bracing for more impact too.

“We now have what we call, in certain instances, co-operative agreements being entered into by the banks which might sit alongside the main documents,” Mr Doyle said in an interview, as he outlined how banks were seeking to sidestep aggressive action within lender groups.

Lender-on-lender violence refers to members of senior lending groups actually fighting among themselves, particularly if the corporate borrower is not faring well. It involves some private lenders or banks trying to get an upper hand relative to their peers in the group, which in some cases can lead to a change in the structure of a company’s debt to favour certain parties. Sometimes loopholes in documentation are exploited.

“It hasn’t quite reached this market, other than some large transactions, but it’s on the way,” Sydney-based Mr Mavrakis said, noting that Australian banks and lenders needed to be watchful overseas on syndicated loan documentation to ensure they were protected against aggressive behaviour.

With Australian pension funds increasingly making direct investments and loans domestically and offshore, they are also at risk of being caught up in these scenarios.

One example this year related to industry fund giant AustralianSuper and its exposure to US software firm Pluralsight.

Ashurst global banking co-chair Lee Doyle.

AustralianSuper lent funds and also invested in the company, eventually taking a hit of more than $1bn via a writedown, as a restructure handed control of embattled Pluralsight to other private lenders.

Mr Doyle – whose London-based role has seen him working with financial institutions including Royal Bank of Scotland, Santander and Barclays – said private credit was becoming a real force across many jurisdictions and large banks were taking notice.

“The weight of cash that they’ve (private credit and private equity) got now to deploy, the strength they will have in any market they go into, means that they are driving this global harmonisation of their processes and their policies,” he added.

“In one place they (banks and private credit) are absolute competitors, in another they’re becoming symbiotic.”

Citigroup piled into the market in September when it announced an exclusive agreement with Apollo to form a $US25bn private credit and direct lending program, via their respective subsidiaries.

News reports also have JPMorgan forging a partnership with Cliffwater, FS Investments and Shenkman Capital Management as a way to push into private credit.

But as direct and private lending balloons regulators are also taking a greater interest.

The Reserve Bank’s latest bulletin estimated there was $40bn in private credit outstanding in Australia, representing about 2.5 per cent of total business debt. The bank noted while risks to financial stability were contained, private credit markets remained “opaque” and were expected to grow rapidly.

“Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market,” the RBA said.

“For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely … the migration of credit from regulated banks and public markets raises some vulnerabilities for the financial system.”

The Australian Securities & Investments Commission has repeatedly warned this year it is concerned about inaccurate asset valuations and lack of transparency in private market investments.

ASIC this week started court action against non-bank lender Oak Capital for allegedly engaging in unconscionable conduct to avoid the National Credit Code.

An International Monetary Fund report in April cautioned about liquidity risks and also noted private credit borrowers tended to be riskier than their traded counterparts.

“If you really do get to a place where private credit is $US28 trillion of assets (globally), then how can a regulator feel that it’s dealing with systemic risk in its geography if it doesn’t have some degree of oversight and control,” Mr Doyle said.

“There is a risk that in a downturn the (private) credit funds are much more likely to be primarily focused on their own financial returns, potentially to the detriment of the underlying borrower, than the banks are … the funds are more likely to be more aggressive in defending their economic interests.”

Nasdaq-listed Hamilton Lane’s global head of direct credit Nayef Perry in early October said despite interest rates remaining higher for longer in markets including the US and Australia, the environment for defaults in private credit was “pretty benign”.

With expectations that interest rates will continue to fall in major markets such as the US and the UK, Mr Doyle anticipates a pick-up in mergers and acquisitions across the global financial services sector.

“We’re really starting to sense that the buyer/seller conversation is a lot easier to be had now, expectations seem to be meeting. They never meet, obviously, but they’re meeting, and there’s a lot more confidence about the M&A market realistically into next year, probably with a spike in Q2 (second quarter),” he said

Ashurst advised ANZ’s purchase of Suncorp Bank, a $4.9bn deal completed earlier this year.

Mr Doyle said he believed 2024 was the first time in 20 years that banks “owned their own agenda”.

“Whereas the last 20 years have been driven by geopolitical, geo-economic and regulatory change agendas, actually the banks are now able to look at themselves and say … this is what we want to do.”