Bank Bill Swap Lending

I was talking to a large property investor/developer last night about how he finances his deals. It was at a developer networking event so unfortunately the conversation got cut off so couldnt fully quiz him.

I'll repeat what he said and if someone could explain how his finance works i would appreciate it.

The guy buys towers in the city and inner melb, refurbishes them then leases them out. Commercial and resi.

He adds some equity to the deal, and he said he funds the debt using the bank bill swap. He said the rate is like 1.5%.

Can someone explain how this lending works and can be accessed?

 

If he’s buying towers, he’s likely in Corporate or Institutional segments (>$35m group debt). In those segments, interest rate is structured as BBSY + customer margin. BBSY is a public market rate.

Recently BBSY was 0.10%, so with a 1.40% margin, total interest cost to customer is 1.50%.

This is different to majority of investors operating within business bank segments. Rate is usually a business bank base rate (which already has a margin) + a customer margin.

 

Keep in mind, many developers will bullsh!t you about the rate they pay.
I also doubt inner city towers requiring refurbishment would be on a ~1.5% margin.
Also, these type of borrower often pay an establishment fee of 20-50bps, and sometimes an early repayment fee.

 

Most don't know what bank bills are.
I was using them for a while in the 90s. 3 mth bank bills at less than half the loan rates.
Only lasted a couple years as the banks counter parties moved to much bigger amounts.

Australia | Bank Acceptance Bills Rate | CEIC
90 day BB is 0.41%, so the bank will sell it to you with a margin.
I don't think they do small amounts these days.

 

Those rates sound about right, it was cheaper than a conventional loan and we were able to capitalise the interest as well.

Just a pain to refinance every 3 months.

 

On commercial facilities it now normally just rolls / re-prices every 3 months for usually a 3 year term. But you can always hedge.

CBA were pricing business bank property deals at 1.90% not that long ago, Macquarie and ANZ similar - so 1.50% all up for a higher loan $ isn’t unreasonable. But yes, establishment fees aren’t cheap. More sophisticated service offering & credit appetite though, so cost of business at these levels.

 

It was debited to the account, interest only or capitalize if and until you could.
I don't remember interest only those days unless it was for business at a much higher rate.
And as Terry posted a few days ago all paperwork needs to be kept for 7 yrs after disposal.

 

Can this lending be used for development sites? Ie, both site acquisition and construction lending?

 

As far as i know it could be, it's a business loan and generally not for residential property.
2.95%pa on a 90day bank bill

 

That is incorrect. I used to be a senior dealer with a major bank. Bank bill rates are determined by market and the published BBSW rate set by the financial market bodies and reported by ASX Limited is determined daily for various periods with the 90 days rate being the benchmark. This is also a rate used and considered by futures dealers and market makers for other periods. . These are the "official rates" which are benchmark. Think of like the RBA cash rate is to official dealers.
Benchmark Rates

Banks then apply margins on top. This may be many % points higher based on value and risks and many factors. A common bank bill borrower may pay 5% above BBSW and rarely close to the BBSW rates for prime borrowers with excellent banking facilities and needs and are preferred customers. Think BHP. Theirs may be 2%...or more. In addition banks will charge a rollover fee that may be a further 1.5% for each rollover event.....so 6% annually. The better the borrower and its rating and its security the lower the rates may be where the borrower has power to negotiate. A lender may take a floating charge over say a gold mine or over specific hard assets. (eg Railway stock)

Bank bills enable the bank to securitise debt so the bill can be sold on market through the money market to other investors (banks and others). Bank Bills are highly liquid when issued by the 4 major banks and can be sold and settled within 24hrs to other money market participants. They earn income as a rate of interest applies to the sale so the price paid is less than face value. On maturity the bill is exchanged for its face value.

ANZ Commercial Bill Facilities | ANZ

 

I was using them from 91 to 94, then the bank said they no longer had counter parties to buy them at a time when rates were dropping fast.
Once the term is up you don't know if you will get the loan again and it has to be repaid.
So I had to refinance, though rats had dropped off to less than half as when I started.

It's a bank, so there's always fees.


This was a good rate at the time...

 

So the rollover periods in your examples above @Piston_Broke were 90 days and 180 days.

Lets say this type of lending is used, and is needed for 3 years, then it would need to be reapplied for 5 or 11 times. Is it hard to rollover? Could the bank say no? Does anyone have an example of current rates with all the fees?

 

It would be a 3 year term, with the facility “re-pricing” to market rates every 90 days given the base rate BBSY is a market rate. So at BBSY + (x)% customer margin.

There can be a small rollover fee but it’s automatic, no assessment. The actual facility renewal is at the end of the 3 years. Bank generally can’t say no during contracted term if you meet your covenants.

If you use it for developments, banks will make you hedge for the loan term because they’ll build capitalised interest into the loan limit - so both you and the bank need certainty as to what the figure is otherwise you won’t have enough funding available if rates increased.

 

It was a while ago...from my memory in those days the term was 182 days and a week prior before the term to renew another bill.
In '94 a few weeks before they told that there was no counter party to accept the bill and they would be happy to give me long term finance going forward.
Previously they would not give some young self employed rebelious long haired lout a 20 yr house loan.
So the loan is pretty much at call.

 

Bills can have rollover terms of 30, 60, 90, 120, 150 and 180 days commonly with some variation eg 92 days based on weekend etc. . 90 and 180 are more accepted by markets as these are deliverable bills for futures contracts...However the market parcel may need to be a larger denomination to be a futures contract deliverable parcel not 500 small bills (scrubbers in market talk). Investors (large institutional incl superfunds and trustee companies) will buy the small stuff in a large bundle ($20m, $80m and much more) as its as good as cash since bills can always be sold on the day for cash. My largest bill sale was three billion in one deal with a investor institution. The rate on these small bills is often attractive as it better than cash deposit rates for something that can be as liquid as cash. Can also be sold to official dealers to settle RBA cash accounts so they arent overdrawn. Thats not good.

Commercial lending staff will generally initate a "facility" for the borrower for $X and Y years. Generally interest only but sometimes with reducing credit limits. The smaller and junkier the bill rollover the higher the margin.

Bill lending can also be fixed rate using swaps contracts arranged by Treasury by the Commercial lending team. There are also other ways such as interest rate options which can cap or floor the rate. Options are typically derived from futures and swap market rates and Treasury hedges the loan facility with a counterpart deal. This ensures the bank isnt speculating on rates rising or falling v the customer deal but locking in margins.

 

90-day BBSY on March 13th was 0.20% and on May 10th 0.98%, Can change very quickly so buyer beware