What’s top of mind for Australian finance execs?

SYDNEY — When discussing development
challenges in Australia, one particular topic at the HICAP Australia New Zealand conference was construction risk. Panelist Kenneth Nguyen, a partner for banking and finance for London-based Ashurst,
said construction company insolvency is at the top of his mind.

“We’re probably at record levels when it
comes to insolvency issues hitting both contractors and subcontractors and
trade contractors,” he said. “I recently did a site visit for a recently
completed build-to-rent project in Melbourne. We’re chatting with the
development manager, and I said ‘you did a great job [with the building], but
during the construction, four of the key subcontractors went insolvent.’”

Panelist talking about the state of debt and finance said construction
insolvency cases are up 28% yearly, and the construction sector is the biggest
for insolvency in Australia.

“For work of any reasonable scale
development, there’s pretty much a working assumption that at least one of your
key subcontractors is going to go insolvent during the course of construction,” Nguyen said. “That’s a real issue for anyone in the
development game and financiers. It’s why financiers are putting such a great
emphasis on doing due diligence not just on the developer but also on the
builder and understanding the builder’s balance sheet builders and the
builder’s work.

“The last thing anybody wants — whether it’s
a financier, developer or a builder — is a project effectively falling over
halfway through because the builder has fallen over halfway through.”

Nguyen was on stage at the Sofitel Sydney Darling Harbour with Adam Bury, head of hotel debt advisory for JLL Hotels &
Hospitality Group; Vivian Chang, partner, tax for Ashurst; and Nigel Greenaway,
CFO for Sydney-based Crystalbrook Collection. The panel was moderated by Lindy
Randall, partner for Ashurst.

Bury said comparing how finance works in
Australia to the rest of the world is completely different. “I don’t believe that using a non-bank
financier or creative financing, whatever it may be, to gain that extra little
twist is the right way to move forward with an investment, a development, or
otherwise. If you’re using financing, you’re pushing it a bit too thin,” he
said. “If you look at the U.S., the capital stack looks completely different
because you have that debt, mezzanine, preferred equity and ultimately
ownership has a very small chunk of equity at the top of the stack. Hence
the reason you see that keys are handed back very quickly in the U.S.”

Bury said that can lead to more brokerage
activity, but it doesn’t lead to a more stable market. “One of the things we’ve seen in Australia
over the past 5 or 10 years is the stability in the market, and I think that
equity that owners have indeed certainly helps create that,” he said.

Bury also said Australia has many similarities
with how hotel finance is handled in Pacific Asia. “In Asia, particularly cross-border, it’s
driven by relationships… I see the parallels with the Australian system now and
forming those bonds with your financiers,” he said.

Greenaway said, while mentioning potential
financing his company pursued in New Zealand, there are a lot of different
nuances to deal with. “I’m very fortunate with the lens I have
with a group like Crystalbrook,” he said. “I sat down with someone the other
day and I said, ‘Listen, it’s about EBITDA, valuation and cash.’ They are the
most important things to me right now. You guys all over there drive that
EBITDA right now. Cut the costs and build the revenue.

“Those are the three key things to me,” Greenway said. “When you think about that from a bank’s perspective, if anybody can talk
to them and give them comfort and objective positions in relation to your
enterprise in those three key areas, the banks will be fine with you. And
they’re keen to play with the right parties and partner with you.”

Chang was asked about the various tax
changes happening with tax laws in Australia right now (new legislation was
passed earlier this year). She said the new rules are complex, especially
regarding how to manage interest deductions.

“Everyone’s still trying to grapple with
waiting for the tax office to offer guidance,” she said. “We’re finding a lot
of different clients modeling this and definitely seeing a major impact on the
interest deductions, particularly in the hotel space where it’s hard to really
predict what that might look like in the coming years.”

Chang said it’s also a tricky balance right
now working with banks on the new tax laws. “There’s a lot of education, and banks are
grappling with how to deal with these rules at the moment,” she said. “To
comply with the rules, you are asking [the banks] to limit their recourse to
critical assets, which can be a touchy subject… Until we get better advice from
the tax office, it is quite a fraught area and something that needs detailed
looking at in the area of financing.”