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Important notice for St.George business customers

For business customers with facility agreements that include one or more of the following facility types:

  • Bank Bill Business Loan;
  • Bill Acceptance / Discount Facility; and
  • Construction Loan.

Over recent years, markets have faced an unprecedented period of low and negative interest rates across global markets. Now with historically low interest rates in Australia, and the potential for further reductions, the issue of negative interest rates requires consideration by our business customers.

Recent market developments have increased the focus on zero interest rate floors in loan contracts– being a provision that states if the external reference rate (the Bank Bill Swap Yield or ‘BBSY’) falls below zero on any given rate reset/rollover date, then the interest rate in the document for that interest period is deemed to be zero.

On 24 March 2020, we published these important notices in The Australian and Australian Financial Review newspapers.

What does this notice mean for you?

If your facility has been documented on a newer ‘Business Finance Agreement’, it will already contain a zero rate floor for BBSY and there is no change for you.

For facilities on older contracts (normally titled ‘Facility Offer’), there are some examples below of how a negative BBSY rate would function once this change becomes effective on 23 April 2020. The examples below are general in nature and you should always refer to your specific documentation. You should seek your own independent legal, accounting, tax and other financial advice.

 

Example 1: Bill Acceptance/Discount Facility

Variable Rate - if BBSY rates are negative at the next bill rollover date, or on the date of drawing of a new bill:

  • If your discount rate is BBSY, then a zero rate floor will apply. Your discount rate would be 0% p.a. if BBSY was negative.
  • There is no change to the calculation of your acceptance fee or line fee.

Fixed Rate:

There is no impact to a facility during a fixed rate period. Once the fixed rate period ends, the zero rate floor will apply as outlined above.

 

Example 2: Bank Bill Business Loan

Variable Rate - if BBSY rates went to -0.10% at the next rate reset date, or on the date of drawing of a new facility:

 

Rate (% p.a.)

BBSY -0.10%
Base Rate (with a zero rate floor) 0.00%
Business Loan Margin + Risk Margin 2.50%
Total interest rate 2.50%

Fixed Rate:

There is no impact to a facility during a fixed rate period. Once the fixed rate period ends, the zero rate floor will apply as outlined above.

 

Example 3: standalone derivatives (such as an interest rate swap)

If you have a standalone derivative (such as an interest rate swap), you should contact your Financial Markets specialist to understand whether your facility has a zero rate floor, or if you need to consider changes to your hedge.

Rate environment with positive rates:

Diagram of Bank of Melbourne's positive rates between the bank and the borrower and between the borrower and loan facility

If BBSY (floating rates) are above zero, a hedger with an IRS will be paying:

  • The value of BBSY on the variable loan facility; and
  • The value of the fixed rate leg of the IRS contract.

A hedger will be receiving:

  • The value of the BBSY leg of the IRS contract.

Negative rate environment where there is a zero rate floor in the loan contract but not in the IRS:

Diagram of Bank of Melbourne's relationship with the borrower in a no hedge scenario

If BBSY (floating rates) are negative, a hedger with an IRS without a zero rate floor clause will pay:

  • The value of the fixed rate leg of the IRS contract; and
  • The value of the absolute BBSY leg of the IRS.

 

Is there anything you need to do?

No, the above changes will automatically take effect from 23 April 2020 and the remainder of your facility agreement remains unchanged.

We’re here to help

If you have any questions about this change, please contact your Relationship Manager or Financial Markets Specialist.

 

Important information

This communication has been prepared without taking account of your particular financial situation, needs or objectives and is not to be construed as financial advice. St.George strongly recommends that you seek appropriate independent accounting, tax, financial and legal advice before acting on this information.