The USA, is the centre of the investment Universe and what happens in the USA dictates the mode and tempo for markets all around the world. So it is impossible for a Global Recovery to occur if it does not include a recovery in Confidence, Growth and Economic Fundamentals in the USA. As far as a resurgence in Finance and Liquidity in Debt markets, the “buck” starts and stops in the USA.

So reading yesterday in Bloomberg news that the pursuit of higher yields by investors is leading to resurgence in demand for Commercial Real Estate Collateralised Debt Obligations (CRE CDO’s) ( got me thinking that the markets may have finally bottomed and we could be moving into the next phase of economic cycle –  growth lead by confidence and new investment (as opposed to Government funded GDP).

CDOs are packaged pools of debt that are rated and then sold to investors as Bonds. Assuming the borrowers behind the debt continue to repay their debts (i.e. a high majority of the individual loans forming part of the original pool of funds is repaid), investors receive a regular coupon on their investment (see for more information re CDO’s)

CDO’s lost their appeal in 2007 when the Sub Prime crises caused many of the CDO’s at the time to be written down, leading to Billions of dollars in losses for investors all around the world.  

Of course, a large part of the problem up to 2007 was that Credit Agencies were not adequately assessing and rating the risk associated with these investments. This resulted in an inflated amount of demand for these products, due to their perceived lower risk, high return profile. At its peak in 2006, over $520b worth of CDO’s were written alone and the sector became heavily reliant on this form of funding.

However, since 2007, the market has been defined by a low risk and much more conservative investor. This has led to many investors accepting very little and sometimes zero return on their capital whilst waiting for confidence, in a post GFC world, to rebuild. Of course, during this period, their has been very little interest and investment in CDO’s due to the stigma attached to this form of security.  

It has taken a good part of 5 years but recently we are seeing “green shoots” appear in the Global Debt Markets, with more and more investment gravitating towards property secured debt instruments. In fact, many of our Banks have begun refinancing large tranches of their loan books, previously backed by Government Guarantees, with lower cost funding now available on the Global Markets  ( ), a clear sign that demand for this type of product is improving.

Continued demand for Property related Securities should lead to a decrease in the cost of funds for our Lending Institutions. This will encourage Non-Bank Lenders to once again enter and compete in our local market and increase competition for our over dominant four Major Banks. Competition, particularly in the Commercial Property space, has been almost non-existent since the GFC with the Four Major Banks continuing to overcharge customers (in real terms, margins charged by the Major Banks on Commercial Loan are on average, double their pre GFC levels but disguised by the current low interest rates (See ) without any major concern of losing market share, due, predominately to the lack of real competition.

Its competition in any market, that ensures continued innovation between competitors and guarantees that borrowers have access to the most competitive forms of funding, at the best price.

Unfortunately, borrowers, investors and SME’s today have only limited options as far as Commercial Finance goes and this, along with the current tight restrictions on Credit, are a major road block to a return in confidence, investment and sustainable growth, by Australian Business owners.

Hopefully the recent improvements and “Green Shoots” in Global Credit Markets will continue and result in resurgence in Competition, Products, Policies and overall conditions for Commercial Borrowers in 2013. I for one am optimistic that this is a positive sign of things to come.


Con Katsiouras

Director – Folio Finance

Ph: 03 88445555