Thursday, November 23, 2017

Rinehart, Pratt lead push to direct super to business

Some of Australia's most powerful corporate leaders have called on the country's $2 trillion superannuation industry to become a major source of lending for local businesses in a move aimed at bypassing banks and stimulating investment.

In a roundtable event organised by Australia's richest man, Visy Industries executive chairman Anthony Pratt, and facilitated by Fairfax Media, the big super funds were urged to use their investment arms to support entrepreneurial companies at a time when international financial regulations was making it more expensive for banks to lend.

Mr Pratt's appeal was backed by Australia's richest woman, Gina Rinehart, former prime minister Paul Keating, Macquarie Group chief executive Nicholas Moore, ANZ boss Shayne Elliott, 21st Century Fox director Rod Eddington, Future Fund chief David Neal as well executives from three of Australia's biggest superannuation funds and the head of the Commonwealth Treasury John Fraser.

Addressing the gathering in his apartment in Sydney, Mr Pratt said his packaging business had funded its expansion by borrowing long at fixed interest from United States superannuation funds, something that wasn't possible in Australia. At issue, he said, is the difficulty even large corporations have borrowing for long periods of time from Australian banks.

"Australia has over $2 trillion in super funds, we are the world's fourth biggest money manager," Mr Pratt said. "In other words we are awash with funds and we can't place them fast enough to keep pace with contributions, yet many companies still have to go to America to borrow long-term."

"Just last week in Ohio we had a super fund bond raising of $200 million over 30 years. It was oversubscribed by $4.8 billion. News Corporation and Westfield are also big borrowers from US super funds. News Corporation even did a 100 year bond."

"Bringing longer-term bond financing into Australia's corporate mainstream is an idea whose time has come."

Visy is one of the few Australian companies that has managed to squeeze long-term financing out of Australian superannuation funds, obtaining a $150 million a 10-year loan from AustralianSuper [TICK] earlier this year in a deal brokered by Westpac.

Mr Keating, whose government established Australia's superannuation system, said banks would become increasingly unable to fund businesses directly as the next wave of the Basel rules on capital adequacy made lending more expensive.

"If you are a Linfox or a Visy you're OK," he said. "Below that, you are not. Australia has never had a robust debt market. You've been able to get long-term finance by giving away a bit of your equity, but not by borrowing."

He argued Super funds had duty to fill the gap.

"The super scheme that I set up was focused on accumulation," the former prime minister said. "Now that Australians are living longer and moving into retirement we need superannuation phase two," he said. "That means funding retirement, guaranteed income. It means tapping into long-term income streams.

"We can't give super funds money and have them not use it for this," he said. One reasons most had not directly funded businesses was stodginess. Another was the backwardness of the banks who were ideally placed to act as credit rating agencies for the funds.

Ms Rinehart said she "loved the Australian banks", who along with 19 overseas banks had funded her giant $US10 billion Roy Hill iron ore project. But small to medium sized businesses that used banks were hit with covenants that put them at risk when conditions turned down.

Super funds were in a position to provide funding at lower rates and over longer terms. "Anything we can do to make ourselves more cost competitive internationally is worthwhile", she said.

Macquarie Group chief executive Nicholas Moore said the proposal would give most Australian firms their first access to long-term debt denominated in Australian dollars, something that would strengthen the corporate sector and make it more resilient.

ANZ chief executive Shayne Elliott said 5 or 7 year lending was a "terrible business" for the banks on which they barely made money. He didn't see super funds as competition, he saw a mutual interest in having them provide finance that the banks could not using banks credit assessment facilities.

Linfox founder Lindsay Fox said he had done well out of Australian banks, but that if he was able to borrow in Australia long-term for 20 years he would be able to take his trucking and logistics firm to the next level.

"We deliver to and from warehouses but we don't own the warehouses. We could take them off the Coles and Woolworths balance sheet. Amazon is going to make life difficult for retailers. We would be able to help them," he said.

Treasury chief John Fraser said he supported the idea and that if anyone was aware of any red tape that stood in the way, they should let him know.

"However, my enthusiasm for the corporate bond market does not extend to tax breaks," he added.

In the second 'Chatham House rules' part of the roundtable which would not be directly reported, representatives of industry super funds cautioned that they lacked some of the advantages of banks. Why they had access to members funds, they were not able to lend money to corporates at a near loss and hope to make a profit on other aspects of the banking relationship.

"My whole purpose is retirement income for my members," said one. Whatever we do needs to make money, and that might make us more expensive than the banks."

Bank representatives said that assessing credit risks was far harder than it looked, particularly over a 20 year time horizons.

"Some businesses have been with us for 50 years," said one. "When everything goes wrong, we stand by them. This happens every day, it is a very difficult skillset."

Mr Pratt said the historic roundtable was the beginning of a national conversation. Super funds were trying to place trillions of dollars in locations that would yield stable returns. Businesses were looking beyond banks and foreign lenders for long-term finance.

In The Age and Sydney Morning Herald


COMMENT: The billionaires have started something. Now to make it work

On the face of it, $2 trillion in super funds needing a home and tens of thousands of Australian businesses needing long-funding is a match worthy of The Bachelor, or The Bachelorette.

Even more so, when you consider how poorly matched things are at the moment. Australian super funds have an outsized half of their funds invested in share markets. Overseas it's more like 10 per cent. Beyond share markets, commercial properties and government bonds, they are poorly diversified.

At the same time Australia's biggest corporations, giants such as BHP, have to head overseas when they are looking for finance, even though a few blocks away in Melbourne there are hundred of billions of our dollars looking for a home.

Listing on the sharemarket can fill the gap for some, but that means losing control. The three biggest corporations headlining the Fairfax Media Visy Roundtable were privately owned, and each is keen to stay that way.

Which means heading overseas to find funds (even though Australia is awash with them) and running or insuring against exchange rate risks.

In the nicest possible way, over exquisite food and bottles of Grange, Anthony Pratt is trying to bang heads together.

He knows it will soon become even harder for Australian corporations to get Australian finance from Australian banks. New internationally-agreed capital adequacy rules will make loans to companies more expensive.

Most of the roundtable agreed, apart from Treasury Secretary John Fraser who mused that it was just possible that Australian firms had no real problem obtaining finance. The problem was more likely to be that many of them didn't want it, something he is grappling with as he prepares new official forecasts for Scott Morision's December budget update.

David Neal, chief executive of the government's Future Fund, was concerned that the money in superannuation accounts weren't as patient as was widely believed. In retirement (and more and more account holders will be retired) the owners of the funds can withdraw them at will. Most of the time they won't, but in financial crisis they will do it quickly.

And super funds don't have the resources needed to micro manage relatively small loans. It wasn't long ago that they wouldn't get out of bed for $200 million, said one of participants.Graphic here

But they are going to have to change. Whereas high returns used to matter most for the funds because most of their members were building up nest eggs, what will soon matter most will be stable returns. A huge chunk of their members will be retired.

What might be needed is some sort of legislation to stop members withdrawing at will, to force and encourage them to take out an annuity that will pay them a fortnightly income for the rest of their lives.

The father of compulsory super, Paul Keating, has ideas about how that might work. The conversation is indeed just beginning.

In The Age and Sydney Morning Herald