[music]

Why has one Sydney property developer

[music]

got investors so worried?

>> Sydney's housing crisis just got worse

with a major developer falling into

administration owing billions of dollars

with angry buyers in limbo.

>> Administrators of a major Sydney

developer have warned it could collapse

[music] completely before the week is

out.

>> There's no cash here. Uh we don't have

any cash to pay wages. We don't have any

cash to pay suppliers.

>> Welcome to the Bloomberg Australia

podcast. I'm Chris Burke coming to you

from [music] Melbourne. A crisis at a

major Sydney property developer has put

the spotlight on a fast growing but

little understood corner of Australian

finance called private credit. And even

if you've never heard of it, there's a

good chance some of your retirement

savings are invested in it. This week,

finance reporter Richard Henderson joins

me to look behind the headlines, explain

what private credit actually is, and

whether Australian investors should be

worried. Rich, welcome back to the

podcast.

>> Thank you very much.

>> So, you have been reporting over the

last week on this uh Sydney property

developer called Bethl, which recently

fell into insolveny. Construction firms

have been collapsing across Australia in

big numbers for some time now. So why

are the troubles surrounding this

developer attracting so much interest?

>> I [snorts] think it's because the size

of the loans. we have uh around $3.3

billion Australian dollars owing uh from

Baffla and um you know that's a that's a

pretty significant number uh when you

consider the you know the overall market

for private credit in Australia uh last

year was estimated by ASICH to be 200

billion uh with about half of that in in

property. So, you know, this is a pretty

significant uh headline number and I

think that has [clears throat] a lot of

folks worried that there might be others

out there and that this could bubble up

to the surface to be quite a quite a big

problem.

>> And let's just let's just talk about

private credit. Um, it's a very kind of

corporate sounding name that that almost

sounds like an exclusive club, but it

actually covers a huge lay a huge range

of lending, right? tell us more about

the industry and why it's grown into

this this $200 billion industry you just

mentioned.

>> Yeah, and it could be much bigger than

that. Um by now that um that estimate is

almost uh a year old uh from ASICH the

the regulator. So private credit

essentially it's just lending uh but

instead of it coming from a bank, it's

coming from uh you know private

investors whether that's a a pension, a

foundation, endowment, a wealthy family.

Uh and so in Australia it's become quite

tied up in real estate that's quite

unique. Uh but at its heart this is just

lending basically. Uh in the US and in

Europe the um you know these types of

loans have exploded in popularity. the

market has ballooned since the financial

crisis because banks uh basically came

under a whole lot of pressure and new

regulation after the financial crisis

especially in the US and so private

credit non-bank lending shadow banking

these are all uh you know the same thing

that ballooned after uh after the

financial crisis in Australia it's a

it's a been a smaller um obviously a

smaller market and that growth has been

um a little slower but recently it's

really taken off.

>> Yeah. So, Baffler, uh, that's a big it's

a big developer in Western Sydney,

right? Um, it's a also a good example of

something that makes, as you said,

Australia's private credit a bit

different from the rest of the world.

Uh, that that big exposure to to

property. Do you know why uh that's

happened here? Why why we are why

private lenders here love property so

much? I think it's been tightly linked

to the big banks stepping back from the

market and focusing um a bit more on you

know sort of owner occupier um sort of

mortgages rather than these um these

loans which are directed towards

property developers. Uh some of them can

probably be you know more speculative we

could say. Um, and another thing you

absolutely have to keep in mind with

private credit, investors love it

because it is floating rate. What does

that mean? It means it's um you the

amount of interest you would be paying

on a loan is always above the current uh

interest rates, right, set by the

central bank. And so in a rising rate

environment, the actual nominal amount

that you would get in yield will be

quite a bit um you know could be quite

significant. So these can be wonderful

investments but because that's quite a

lot of yield that you're earning that

means whoever is paying that the uh the

borrower they're going to be under

potentially a bit more stress as those

interest rates go up as we've seen. uh

that floating rate nature of the debt

means that you're going to be paying a

little bit extra uh when rates rise.

>> Yeah, good point. Um is this also uh a

symptom of the wider malaise in the

housing sector? I mean, we had that data

from totality this week showing Sydney

prices are now down about 7% from their

peak in February. Uh thanks to those

those three interest rates you

mentioned. Um also the the changes to

tax breaks in the May budget.

>> Exactly. This is all intertwined and

it's a it's a really important moment

for the Australian property market. You

know, we haven't really seen many

instances, especially this quick uh of

um prices coming down so quickly and you

know, they they've had such a great run

since the pandemic. Uh but this is a

really significant pullback. Partly it's

cyclical. That's to say it's linked to,

as you say, the the increase in interest

rates. And keep in mind, we still have

fully priced in one more at least one

more interest rate hike, right?

Financial markets are telling us,

traders are telling us they expect the

RBA to hike again, right? So that means

more stress uh especially for these

private credit guys um those who have

borrowed from the private credit market,

right? So, uh, you're absolutely right

and let's just unpack very briefly that

May budget that's peeled back some of

those sweeteners, uh, negative gearing

specifically for property investors.

They want first home buyers to get a

better deal. The government, right, that

was their big driver. So, let's remove

negative gearing for property. Well,

guess what? That's taken investors out

of the market. That's a huge, huge chunk

of the market. people often say around

40% of residential um home buyers or

investors. Well, guess what? That group

now is is questioning whether they

should partake in some of these um you

know purchases and everyone's really

just trying to figure out what is going

on with the property market. And so

bring it back to Ba Baffler, they're

basically seeing and they've told us

this a slowdown in sales. So they they

might have actually gotten through this

period, but it's this slowdown in sales

that's basically had less money coming

into the company to keep operating.

That's really a key feature of what's

going on here.

>> And all those factors you mentioned

obviously mean greater scrutiny on the

sector. Um Sarah Court, she's the chair

of Australian the Australian Securities

and Investment Commission ASICH. Uh she

was speaking at an event last week and

made a very interesting observation. Uh

she said we're seeing the first

significant cracks in Australia's

private credit industry. You know,

private credit is not a new thing.

They've been uh they've been monitoring

the sector for uh quite some time. Why

is uh why is asset kind of turning up

the heat a bit on the sector? what's

what's their main concerns now?

>> ASICH are really zeroing in on private

credit and they're doing a lot of work

behind the scenes. Uh you know, partly

they're worried about retail investors.

They're worried that um you know, folks

who are investing in private credit

funds for instance might not fully

understand the risks and again those

risks as we're seeing play out can be

heavily tied towards real estates and

the real estate market is under pressure

right now. So, ASCA are really trying to

get to grips with some of the players in

this uh in this in this sector to really

make sure that end investors including

retail investors really are um are

getting a good deal. They understand

what they're um what they're buying when

they invest in one of these private

credit funds.

Now, the words private credit also make

it sound like an industry that's well

private and and pretty removed from the

typical investor and stocks or bonds,

but that's not really the case, is it?

Our super funds have been piling into

private credit in recent years. Just how

exposed are they and what what do we

know about where that money is actually

being invested?

>> That's a great question. And you know,

some of the larger super funds uh that

have spoken about this in the past year

or so, they they often say something

very similar to one another. They say,

"Oh, we love private credit. We're

building out our private credit

exposure. You know, we're loading up the

portfolio with private credit." But then

they say, "But not Australian private

credit,

>> US private credit, European private

credit, but not Australian private

credit." because they as has been voiced

to us and and and widely reported

they're worried about this heavy

weighting to the real estate sector and

they prefer US private credit which is

um you know a a typical um loan might be

to a you know a medium-sized company

somewhere in the Midwest in Iowa or

something like that a car parts

manufacturer um you know not a real

estate development that might actually

you know that that might not work out as

we're seeing in Western Sydney.

Yeah. Um though there was a lot of

concern earlier this year about US

private credit, right? And um a lot of

big headlines, a lot of Bloomberg

stories. We saw some big Wall Street

players like Polo get hit by redemption

requests where you know where where

investors essentially want to pull their

money out um of of a manager's fund.

What's the difference between those

issues that we saw in the US and what's

happening now with Baffler in Australia?

So those issues, you know, this was part

of the um the overall concerns about

software companies in the United States

and whether AI, the rise of AI would

erode the revenues of software companies

that had borrowed heavily in private

credit markets, right? And so we saw um

especially retail focused private credit

funds suffer redemptions and in some

cases have to um you know limit those

redemptions, right? quite a specific

issue and we're seeing that play through

a little bit. You know, some of those

concerns have eased up a bit. You know,

the so-called SAS apocalypse um uh that

software firms were apparently facing.

You know, those those concerns have

eased here. Obviously, it's all property

related or or you know, property is the

big driving force. But we're actually

seeing, you can mirror those two issues

because some funds in Australia, we're

getting, you know, we're getting news

kind of filtering through that they're

now starting to gate private credit

funds because of um you know, concerns

that we'll see a wave of investor

redemptions as as folks wake up, open

the newspaper or you know, read it

online and see these headlines about

private credit.

>> Okay, so let's put all this in a bit of

perspective. We've got one one big

developer that's in trouble. We've got a

regulator warning this could be the

start of something bigger, but it's

still unclear just how how much risky

exposure we're dealing with uh in

Australia. How worried should we be

about private credit? So, I think medium

worried uh personally I would say

because keep in mind this is private

credit. This isn't banks. You know,

we're not on the brink hopefully of a

bank crisis, right? like the financial

crisis in 2008, obviously tightly linked

to the housing market. This is not that

and that's great. That's wonderful. But

what this is is a very acute series of

um drivers here. Higher interest rates,

uh heavy waiting to property, falling

home prices, a property slump, um tax

changes that are disincentivizing

investors from taking part in the

property market, adding further downward

pressure on prices. This is all hitting

at the same time. So we could get more

pressure. We could have more instances

like bafflers where you know they're

they're really struggling property

developers really struggling to sell you

know whether it's apartments or what

have you as they're doing these

developments and therefore struggling to

repay some of these loans that are out

there in in the private credit market in

Australia.

>> If you found today's conversation

insightful, be sure to follow the

Bloomberg Australia podcast wherever you

listen. And for more on Australia's

finance sector, including the latest

stories from Richard Henderson, head

over to bloomberg.com.

This episode was recorded on the

traditional lands of the Warandre

people. It was produced by Paul Allen

and edited by [music] Anley Chandler.

I'm Chris Burke and we'll see you next

week.