World Economy

Aussie Banks Face Plight of Loans to Steelmakers

Aussie Banks Face Plight of Loans to SteelmakersAussie Banks Face Plight of Loans to Steelmakers

Commonwealth Bank of Australia and its competitors are staring at a potential blowout in bad-debt expenses as they try to claw back a combined A$1 billion ($753 million) of loans to steel and iron ore supplier Arrium Ltd., underscoring the looming threat to lenders from the commodities bust.

The banks may recoup less than 50 cents on the dollar they lent to the Sydney-based company, which handed control to an administrator Thursday after lenders rejected its $927 million recapitalization plan with Blackstone Group LP’s GSO Capital Partners, Bloomberg reported.

The turn in the commodities cycle is impacting companies from miners to oil explorers and causing trepidation for banks that have lent them billions of dollars across the world. Bad-debt provisions at Australia’s largest lenders are set to rise to their highest in eight years by 2018, as the chances of defaults in the mining, agricultural and dairy sectors increase, according to a survey by Bloomberg last month.

“It’s a negative for the four big banks given they are unsecured creditors,” said Omkar Joshi, a Sydney-based investment analyst at Watermark Funds Management, which manages A$1 billion. “It is also negative because it looks like the banks wouldn’t even get the 50-55 cents on the dollar that was expected under the GSO proposal.”

Commonwealth Bank, Westpac Banking Corp. and National Australia Bank Ltd. each had lent A$250 million to Arrium, according to people familiar with their exposure to the stricken steelmaker. Australia & New Zealand Banking Group Ltd., which is Arrium’s transaction bank, has a facility of more than A$200 million, one of the people said.

As late as Wednesday, the four largest lenders offered to provide as much as A$400 million in additional loans to maintain cash flow and keep the company’s steel mill running, provided Arrium appointed an administrator of their choice, two people familiar with the discussions said.

  Debt Expansion

Arrium’s net debt expanded to A$2.1 billion as of Dec. 31 from A$1.75 billion six months earlier. It said Thursday that talks with lenders “have now ceased.” While the lenders wanted to appoint McGrath Nicol as the administrator, according to the two people, Arrium turned to Grant Thornton LLP.

Global steel mills are struggling to contend with steel exports from the largest producer, China, which last year boosted its export of the metal to an all-time high.

Arrium flagged in February it may mothball its loss-making Whyalla plant and last year shuttered iron-ore mines and booked write-downs. Its underlying net loss in the six months to Dec. 31 widened to A$24 million from A$22 million a year earlier.

The four largest Australian banks have a combined A$65.6 billion in loans to the resources sector, about 1.8% of their total A$3.56 trillion in assets, based on their latest filings. ANZ’s mining exposure stood at 2.2% of its total loans, while the measure was at 1.5% for Westpac, 1.8% for Commonwealth Bank and 1% for National Australia, according to their latest filings.