Big banks rate hike to trigger defaults

A surge in business insolvencies is likely to hit as Australia’s Big Four banks move to increase rates in response to the credit crunch on international financial markets.

ANZ Bank yesterday became the first of the Big Four to lift rates in response to the rising cost of lending on international markets when it increased its margin lending rate by 0.05%.

Lenders such as Adelaide Bank, AMP Banking, Macquarie Bank, Bluestone and RAMS have already lifted rates on various mortgage and low-doc loan offerings by 0.25% or more.

Bank recovery departments are already seeing a substantial lift in their dealings with insolvent businesses and a rise in the number of distressed loans according to Jim Downey, principal of insolvency firm JP Downey & Co.

Downey says that although he is yet to see a change in the number of business insolvencies, more troubled business are being referred to insolvency practitioners for “care and maintenance”.

“There are concerns that another lift in rates is going to precipitate an increase in insolvencies,” Downey says. “Certainly people who are highly leveraged – and we believe there is a large degree of that out there – are going to find it tough to deal with a higher interest rate environment.”

Another insolvency expert, Jirsch Sutherland partner Sule Arnautovic, says banks have already seen a lift in the rate of mortgage defaults and personal bankruptcies.

Arnautovic says business insolvency rates generally follow up to six months behind personal bankruptcy, but we are likely to see the first signs of distressed businesses in the housing and retail sectors.

“Retailers in general are facing a pretty tough situation and small building and construction businesses; of course there are but niche businesses among them who will continue to make good money, but those who are very highly leveraged will get caught up when rates rise,” he says.

See Andrew Kent’s blog today for more on depressed prices for retail businesses.