Negative Interest Rates: are you speaking to your banker?

In this time of crisis the Reserve Bank of New Zealand ("RBNZ") is working with the "whole of Government and industry to keep [New Zealand's] financial system stable ensuring foreign exchange, debt and money markets are operating efficiently and at low cost". Lending banks are already well-positioned with strong capital adequacy and core funding ratios, and they will also benefit from the RBNZ's Corporate Open Market Operations, through which it buys eligible securities to further support market liquidity and allow banks to keep lending.

Picture Source: Stuff

With NZ employment expected to rise to 9.5% or higher and a 16% fall in GDP by end of the June quarter Westpac's economists are suggesting Adrian Orr and his team will, in their August MPS statement, flag a 75bps rate cut for November, taking the OCR to -0.50% where it may stay for a year before it rises again into positive territory.

To keep long-term interest rates low to "build confidence and enable cheaper lending for businesses and households" the RBNZ has already announced its intention to buy $30bn of government bonds and $3 billion of Local Government Funding Agency (LGFA) debt in the secondary market over a 12 month period.

What does this mean for commercial real estate debt ? The 90 Day Bank Bill Rate, the reference rate for many commercial property loans, is also expected to drop into negative territory as illustrated in the table above. However borrowers can expect some, if not all, of those "gains" to be lost with likely increases to bank credit margins, as risk pricing responds to the deteriorating economy, increased risk of tenant failure and the impact on valuations and covenant compliance, all of which feed into risk pricing models.

Nevertheless now is a good opportunity to carefully review current funding arrangements, to restructure lending in recognition of the times ahead, and to secure more suitably structured longer-term facilities at potentially very good pricing levels. Lending managers and their property risk teams will already be undertaking a review of your facilities, so much better to be part of that conversation than not.

For a more detailed discussion of current market conditions please contact:

Toby Scott

Director | New Zealand

Email: toby@tascott.co.nz

Telephone: +64 (0) 27 5299 879