Senior debt is holding businesses back

December 21, 2016

Business investment is crucial to Australia’s economic prospects and the health of the corporate sector. However, the latest research paints an unhappy picture for this key growth engine.

According to the latest Alleasing Equipment Demand Index (the Index), the investment plans of 53 per cent of corporates are being stifled by restrictive senior debt. This finding follows media reports revealing 75 per cent of the nation’s corporate borrowing is funded by the Big Four banks.

While the picture is slightly better for SMEs* and micro firms, the Index found the issue is affecting corporates across state and territory lines. Inter-industry discrepancies are also minimal, highlighting that senior debt has become a national concern with the potential to severely impact economic growth.

Industry Challenges

Unfortunately, some of Australia’s largest and most capital intensive industries are among the most severely affected by their senior debt arrangement. Businesses in the agriculture, fishery and forestry sector reported the most widespread impact, at nearly 49 per cent, raising concerns that reduced investment in new technologies and equipment may stymie the industry’s hopes of feeding Asia’s rapidly growing middle class.

Mining and resources companies are the second most challenged by senior debt, at 46 per cent. Given recent downwards pressure on commodities prices, and supply-side trends towards low cost, high quality production, an inability to access cutting edge assets could be extremely costly.

The third sector with a high proportion of firms affected by senior debt is construction, where 43 per cent of industry respondents indicating they are bogged down by senior debt. With the government hoping for increased non-mining investment, businesses cannot afford to be left behind as a result of senior debt restrictions.

Record asset obsolescence

As reported in the Index, 68 per cent of Australian businesses are suffering as a result of using assets capitalised past their useful life, which represents an all-time high since the inaugural Index began tracking this data more than two years ago. The sectors that are hurting the most in this regard are those displaying a clear correlation with senior debt constraints, namely mining and agriculture.

With some of Australia’s most prominent industries besieged by senior debt and asset obsolescence, alternative financing solutions are one solution to mitigate this issue.

Alternative sources of finance are crucial to alleviating the challenges associated with senior debt. For the future of Australian business, utilising alternative financing options are vital to fund the necessary investments to expand and enhance productivity in an increasingly competitive global market.

*The Index defines corporates as businesses with annual turnover between $20 million and $100 million, SMEs as businesses with $5-10 million in annual turnover, and micro firms as businesses with an annual turnover between $1-5 million.

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