$A7 billion bank losses loom in credit crunch fallout

About A$7 billion in losses loom for Australian banks as fallout from the credit crisis and a slowing economy are set to turn more corporate loans bad.

Bankers are bracing for rising losses, with the directors of companies they have been prepared to keep on life support becoming increasingly jittery about their obligations to receive such support.

Several parties involved in the collapse of ABC Learning and Allco Finance Group have cited last week's Bell Group court decision as making directors even more concerned about their legal liability for a failing company.

Like Allco Finance Group, this prompted ABC Learning's board to appoint a voluntary administrator after being unable to rule off the accounts. A banker with knowledge of the talks said: "We were with them this weekend and they've taken advice on how the board sees themselves trading insolvent."

Bankers yesterday expressed concern that Centro Properties Group directors could also be reviewing their position.

They fear this could trigger up to A$3.4 billion in provisions against the shopping mall operator and its satellites with its existing debt facilities scheduled to be rolled over by mid next month.

A second banker involved in ABC said yesterday the appointment of a receiver aimed to ring fence further losses. "There is goodwill on both sides, but this thing is such a basket case," he said.

In recent years banks have been prepared to support companies in trading out of their problems and selling down debt. By moving into administration or even liquidation they are forced to increase the level of provisioning made against a loan. At the same time they run the risk of doubling their losses if banks are forced to sell a stricken company's assets in a deteriorating market.

"The problem is the usual buyers trading out of their problems and selling down debt," an insolvency expert said yesterday.

"The problem is the usual buyers for these assets - Macquarie Group, Babcock & Brown and Private Equity, are now no longer in the market."

Goldman Sachs JBWere analyst James Freeman calculates banks face up to A$7 billion in corporate losses over the next year, with companies such as Centro, Babcock & Brown and City Pacific on the problem watch list.

However, some of this exposure has already been covered by existing provisions.

"As the real economy starts to slow and debt refinancing proves challenging, we expect to see further exposures emerge from other known high-profile names in the coming months as their survival is determined by the banks," Mr Freeman said. "All of the banks are likely to be impacted."

ABC Learning's A$1.4 billion collapse comes on the heels of the A$666 million collapse of Allco Finance Group this week.

Both companies have been in workout mode with their bankers since the start of the year.

Several banks yesterday confirmed their exposure to ABC and Allco. ANZ said it had A$182 million in credit exposures to ABC, although some of this had already been booked as a specific provision. It said its exposure to Allco was insignificant.

Westpac, one of the house bankers to ABC, had a A$200 million exposure. "Westpac will continue to work constructively with the receivers, the banking syndicate and the Government on a range of measures to minimise any disruption to ABC's child-care operations," it said in a statement.

National Australia Bank's exposure to ABC is about A$140 million. It is also believed to have more than A$150 million tied up in entities related to Allco, although these continue to trade.

Commonwealth Bank of Australia would not comment on its ABC debt, but its exposureis believed to be about A$650 million. Most of this exposure is related to A$450 million in subordinated notes.

CBA recently made A$100 million in provisioning against ABC and is expected to top up its exposures further.

Still, CBA confirmed it had a A$170 million exposure to Allco.

McGrathNicol partner Chris Honey, who was appointed by banks as a receiver to ABC Learning, said it was too early to estimate how much debt was in the business. He said the bank consortium was prepared to continue supporting the business.

Nearly a year ago, ABC locked in a A$1.43 billion, three-year lending facility across eight banks, although some of this has been sold on to other debt holders.

Outside of the Big Four banks, ABC's lenders include BankWest, Bank of America, Citigroup and Japan's Mizuho Corporate Bank.

ABC Learning's A$1.4 billion collapse comes on the heels of the A$666 million collapse of Allco Finance Group this week.

Both companies have been in workout mode with their bankers since the start of the year.

Several banks yesterday confirmed their exposure to ABC and Allco. ANZ said it had A$182 million in credit exposures to ABC, although some of this had already been booked as a specific provision. It said its exposure to Allco was insignificant.

Westpac, one of the house bankers to ABC, had a A$200 million exposure. "Westpac will continue to work constructively with the receivers, the banking syndicate and the Government on a range of measures to minimise any disruption to ABC's child-care operations," it said in a statement.

National Australia Bank's exposure to ABC is about A$140 million. It is also believed to have more than A$150 million tied up in entities related to Allco, although these continue to trade.

Commonwealth Bank of Australia would not comment on its ABC debt, but its exposure is believed to be about A$650 million. Most of this exposure is related to A$450 million in subordinated notes.

CBA recently made A$100 million in provisioning against ABC and is expected to top up its exposures further.

Still, CBA confirmed it had a A$170 million exposure to Allco.

McGrathNicol partner Chris Honey, who was appointed by banks as a receiver to ABC Learning, said it was too early to estimate how much debt was in the business. He said the bank consortium was prepared to continue supporting the business.

Nearly a year ago, ABC locked in a A$1.43 billion, three-year lending facility across eight banks, although some of this has been sold on to other debt holders.

Outside of the Big Four banks, ABC's lenders include BankWest, Bank of America, Citigroup and Japan's Mizuho Corporate Bank.

- © Fairfax NZ News