KEY POINTS:
As it became apparent early last year that the credit crunch was more than just a speed bump, optimists suggested a number of reasons why we shouldn't panic.
Some - like hopes that the world was "decoupled" from the ailing US economy - have proved to be well wide of the mark.
But on a domestic level, it was said New Zealand corporates were in rude health. It was argued their strong balance sheets meant they had plenty of freeboard to withstand the rising chop from offshore markets.
But as the global slump has lurched from bad to worse, talk has turned to the need for Governments to bail out businesses that find themselves sinking under the weight of debts that banks are no longer prepared to tolerate.
Over the Tasman, the Rudd Government has put together a multibillion-dollar "crisis fund" which would see the Federal Government become a lender of last resort to allow some of Australia's biggest companies to roll over existing credit facilities and avert a new wave of layoffs and a further plunge in business and consumer confidence.
In New Zealand, Prime Minister John Key last month said his Government might extend funding directly to a small group of nationally important corporates if required.
Bancorp Treasury Services' Earl White points out that local companies are already having to look outside the banking sector for the funding they need to manage debt.
"There's definitely been a tightening in the overall exposure that the banking sector is prepared to have. In general terms banks are looking much more favourably on existing clients and much less favourably on new requirements.
"What we're seeing now with some of these borrowers, the banks are saying we're really not that interested and that is probably why Fonterra and people like that are going to the capital markets."
They are going in large numbers too.
First NZ Capital Head of fixed interest Graeme Beckett says he knows of 10 to 12 issuers lining up to launch bond offers that could be worth more than $2.5 billion in just the first three months of this year alone, although he doubts all of them will go ahead.
Beckett said that last year was a record for corporate bond issues at $6.25 billion and this year could be even bigger.
However, with relatively large numbers of corporates tapping the market at once, investors are in the box seat, says White.
"Investors are really saying they don't care what the margin is, they're looking at the headline rate. They made it very clear with Fonterra they wanted close to 8 per cent and what the theoretical margin was they didn't care."
White says lessons learned from the 1987 crash have helped to prevent a fresh wave of big listed investment companies built on huge amounts of debt.
"It [1987] was such a painful situation for us compared to the rest of the world."
But even if overgearing is, by and large, not a huge issue at present, New Zealand's listed companies face huge challenges in the current environment, including the prospect or present reality of lower profits and dividends.
"They're probably going to have to pull their heads in a bit in general terms.
Most have," he says.
"We were aggressively telling our corporate clients to renegotiate and refinance over 12 months ago as our view was the risks were all to the upside and that was 12 months ago.
"The smart operators actually got their house in order quite a while ago, the ones that shut their eyes and hoped are the ones that are having the problems at the moment."
While he believes there will be proportionately less corporate failures here than in other countries, White doesn't rule out the possibility that the Government may have come to the rescue of an economically important business.
"Given that they've bailed out the BNZ and Air NZ in recent history you'd have to say that if things continue to deteriorate the odds would have to be 50:50."
So far local corporates have been doing comparatively well.
Failures among listed companies to date have been limited to finance firms whose reliance on retail debenture funding meant they were always vulnerable to a quick shift in sentiment.
Nevertheless, there is plenty of speculation as to which entities might be vulnerable to the credit crunch and could find themselves having to go cap in hand to the Government.
As our biggest and most strategically important company it was inevitable there would be talk about Fonterra's position.
But Fonterra has ridiculed suggestions that it faces any serious debt issues. Last week one commentator suggesteda good barometer might be how its latest $300 million debt issue to local retail and institutional investors went.
The answer came on Thursday night. Fonterra revealed it had gone very well, raising not just the minimum sum sought but a further $500 million in oversubscriptions.
Talking to the Business Herald before that announcement, chief executive Andrew Ferrier said his company normally raised debt funding offshore, but the credit crunch meant New Zealand was now a less expensive option.
"It's actually kind of nice to be engaging the New Zealand public in such an exciting story we think."
As the results show, the investing public were certainly very engaged.
In the wake of its rapid expansion PGG Wrightson and its 30 per cent owner, the Craig Norgate and McConnon family-owned Rural Portfolio Investments, have been talked about as an example of a group that is relatively highly geared.
A number of analysts have raised concerns about PGG Wrightson's debt levels, including Macquarie Equities' Lyall Taylor, who noted in December that its core debt was likely to approach $400 million this year and that it needed to refinance $180 million in debt by April, "against a backdrop of tight credit and earnings momentum slowing to a splutter".
"We see an increasing risk PGGW will need to undertake a dilutive equity raising."
PGG Wrightson chief executive Tim Miles declined to comment, citing the proximity of the company's half-year result later this month.
Taylor also raised concerns about the debt levels at RPI which relies on PGG Wrightson's dividends to service the interest obligations on the $102.5 million in redeemable preference shares it has on issue, $44.6 million of which will also mature in April.
There will, no doubt, be considerable interest in how PGG Wrightson and RPI negotiate the next few months.
Meanwhile, in Australia where a number of listed property outfits have already failed in spectacular fashion the Government's crisis fund seems to be targeted at helping the survivors.
Should investors worry about the credit rollover risk for our listed property funds?
Not really, says Forsyth Barr analyst Jeremy Simpson. "All the property guys are in good shape," he says, pointing out that among the larger players the only outfits with core credit facilities that expire soon are National Property Trust in November and ING in September next year. Half of AMP Office Trust's facility expires in
October this year but Simpson doesn't see any potential problems rolling that over or finding an alternative facility.
"Going back six months ago, we had quite a few that were having to roll over facilities in the next two years, and they've all basically done it, so they're all in good shape really."
So why is New Zealand's listed property sector in better shape than Australia's? "They've got some serious problems there, they are typically massively more geared than the New Zealand ones and they've got a lot of international debt and investments done in recent times and with the exchange rate coming back that's blown out their gearing as well and they've got more distressed assets
to sell."
Aside from property firms, the Australian market has also featured any number of investment banks and other entities that thrived on cheap credit. New Zealand could only look on enviously as those companies along with the booming resources sector set the Australian sharemarket on a stellar trajectory as ours struggled just to remain viable. But as history shows, leverage can multiply losses just as it multiplies gains as a number of high profile failures in Australia illustrate.
Arguably in New Zealand, any irrational exuberance was focused in the property development market where much of the credit was sourced from retail investors via finance companies, but that's another story.
Things could have easily been much worse here, says Bancorp Treasury Services' Earl White, if private equity funds and other owners with a propensity to gear up their acquisitions had been more successful in New Zealand during the period of corporate activity which the credit crunch ended.
BOND, COPORATE BOND - LICENSED TO THRILL INVESTORS
The move by commercial banks from long-term funding for the corporate sector is good news for retail investors looking for something with a bit more punch than bank deposit rates, says investment adviser Chris Lee.
Lee, who deals with about 300 clients a week at his Kapiti Coast business, says investors are looking for secure investments, including those covered by the Government guarantee, or from issuers with good credit ratings of at least "A" standard or better combined with a return substantially in excess of those offered on bank term deposits.
At the same time, the banks, largely due to funding constraints of their own, are stepping away from longer term funding for corporates.
"They are actually saying no to some of their best customers and that's played into the hands of the public because you've now got the best menu of retail bond issues I've ever seen in my career."
The list of current or recent issues includes offerings from NZ Post, Auckland City Council, Bank of NZ, Fonterra, Wellington Airport, Auckland International Airport, Fletcher Building and Tower, most offering between 7 and 9 per cent.
"So the circle is complete really. The public want the security, they want a better rate than the banks, and the corporates are forced to offer a decent headline rate rather than talking about margins over the swap rate.
"I think the public want simple senior debt, they want money not shares at the end, they want "A" rated or "AA" rated, and they want better than 8 per cent if they can get it. If you offer them all those things you'll get plenty of money."
On the other hand, there will also be "many marginal borrowers seeking to barge into the market to try and get what they can't get from the banks". But with the security of their money a major concern for investors, issuers with anything less than an "A" rating will find it hard to compete with the better rated outfits.
Lee said that with issuers looking to raise about $2.5 billion by the end of March, there was every indication this year would be even bigger than last year's record $6.5 billion, and that's not including Government infrastructure bonds.
