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Credit cycles – when to lend and when to take pause

A key insight from the past 6 months has been the appetite of the major banks to refinance agricultural loans within our portfolio that now meet their credit requirements of income and interest servicing despite cash rates increasing at the fastest rate in three decades. When we see bank appetite return to sectors, Merricks Capital take the opportunity to reduce our exposure on the basis that recycling capital reduces investor risk and allows for reallocation.

Since July this year, $375m of investments or 9 of the 12 loans that have repaid during this period have been through a refinance to an alternative lender, 4 loans to non-bank and 5 loans to the major banks. Over the past 12 months in the agricultural sector, both dairy and cropping businesses have had strong tailwinds driven by high commodity prices and double-digit land price appreciation, and as result our loan book portfolio exposure to these sectors has decreased from 10% to just 3% today.

New capital adequacy frameworks for bank capital (under APRA’s Prudential Standard APS 112) come into effect from 1 January 2023, in recent months we have already seen the impact of these changes on bank appetite, driving increased non-bank lending demand in residual stock facilities (RSF) and mixed-use asset classes. In the past three months we have reviewed over $450m in RSF opportunities, with our focus on inner-city locations with credible sales strategies and an equity buffer of 30-40% (our target Loan-to-Value ratio is typically <65%).

Last week Merricks Capital closed a $43m completed stock facility in Melbourne, supporting the borrower to complete a refinance from a retail bank which will allow a structured asset sale process and illustrative of the market trends above.