I had to add range on the vertical scale of my chart below, because for the first time, one of the rates that I follow closed the week below 2%. That’s the five-year swap rate, which is a pretty good guide for Medical Equipment Finance, most of which is based on five-year terms. If we assume that lenders need 2-3% margin for risk and profit, that means five-year rates should be 4-5%, the lowest yet.
So, if you can bring forward plans to replace or add revenue-generating equipment, you’ll get the lowest rate in a very long time.
As you’ll see below, the trends remain downward, except the five-year swap rate (the red line), which has gone up since hitting a low of 2.28% in early April. But, it’s only up by 40 points. The big question on the minds of many is, “Are we seeing or have we seen the bottom of this cycle?”.
As an avid chartist, my read is that until we see a break in the cycle of lower highs and lower lows in the long-term trend, it’s still a down market for interest rates. For those interested in Medical Equipment Finance, the five-year swap rate is the most relevant, and it would have to break ‘resistance’ in the high-threes to signal a reversal of the trend.
You may recall from a previous post that lenders apply a margin/risk uplift of about 2% to the swap rate, making the current five-year rates to creditworthy Healthcare and other businesses in the high-fours.
The five-year swap rate is trending down again to just over 3%. This bodes well for those who are needing to finance medical equipment, cars, or other assets.
Fixed rates are the norm for Medical Equipment Finance, and they’re now a much larger percentage of the loans for residential mortgages at over 33%, according to Mortgage Choice. It appears that I’m not alone in the opinion that we’ve seen the bottom in this rate ‘cycle’. While variable rates remain more popular, it’s surprising that over 23% of borrowers have undiscounted rates. They all need the services of a good finance broker.
We hear and read about it all the time: the banks’ cost of funds justifies whatever move they make in their published or quoted interest rates. We also hear and read speculation about their true cost of funds. Having watched this closely for quite a while, I can report that most of their costs are in what they pay their local customers for deposits, such as savings accounts and term deposits. A much smaller, but highly publicized, source of funds is international markets.
The third source is what they pay each other to borrow funds, the most common measure of which is Bank Bill Swap Rates, which have fixed terms of 30 days to 5 years. The latter is the typical term for Medical Equipment Finance. So, what range of rates should we expect, assuming a 5-year facility for equipment finance?
I have it on good authority (a banker) that the majors’ cost of funds averages 70-100 basis points (0.7-1.0%) over the swap rate on any given day. Second tier lenders are still disadvantaged by our financial system to the tune of an additional 40-50 points. The 5-year swap rate last Friday was 3.54%, so if we add 100 points, the majors’ cost of funds was about 4.54%. They’ll typically seek a margin of 200 points, so I would expect them to quote a rate to their existing clients somewhere around 6.5%. The second tier lenders will be around 7%, but both rates will be higher for new clients or those with questionable risk profiles.
Interest rates for Medical Equipment Finance are determined by a variety of factors, and the chart below contains the weekly quotes for three and five year bank bill swap rates and three and five year term deposits. There’s not much to suggest a well-defined trend in any of the four, but we’ll keep monitoring them.
Medfin and Experien pioneered specialised finance for Healthcare Businesses and Professionals and did it so well that they have been slowly taken over by National Australia Bank and Investec, respectively. The pioneers recognised the very low risk of lending to doctors personally and to their businesses in view of their being highly intelligent, of the highest integrity, among the most affluent, and having government guaranteed incomes. The credit criteria applied was therefore quite flexible, many doctors became accustomed to almost unlimited credit, and defaults were extremely rare.
But, the changes imposed on the banking industry as a consequence of the GFC has resulted in Medfin being now totally absorbed by NAB, and it’s now unclear as to how the bank will view the Healthcare market in terms of credit policy. The situation is similar at Experien, where the name (and autonomy?) has been phased out by Investec.
While this may further extend tight credit policies for financing things like Medical Equipment, it should represent an opportunity for a new lender or lenders to fill the void in Healthcare. It is also a good reason to retain the services of a broker with extensive knowledge of the Healthcare market and with access to private lenders, because without Medfin and Experien, you’re dealing with just another big bank in which the staff is always changing.
The 0.25% increase in the cash rate last week will have limited effect on finance for medical equipment. The fixed term – fixed rate facilities that are typical for asset finance change weekly and, unlike variable residential mortgage rates, are independent of the Reserve Bank’s monetary policy. There was, however, upward pressure on the 90-day bank bill rate, which rose by 12 points since last Monday. Three and five year term deposit rates were mostly unchanged.
It’s easy to form the impression that an RBA increase will mean higher interest rates for all forms of finance, but lenders tend to ‘factor in’ anticipated rate changes a little at a time based on their cost of funds, individual perceptions of general trends, and strategies regarding market share.
The link below is to a graph that I’ve been building over the last five months, the purpose of which is to gain some insight about interest rate trends relative to Medical Equipment Finance. There’s not much to interpret at this point, but the general consensus is that the RBA Cash Rate (not shown) will trend up. How that affects the short term (3-5 years), fixed rates utilized in asset finance remains to be seen.
Interest Rate Trends 9-10
The banks continue to use their increased cost of funds as an excuse for raising residential housing rates out of step with the RBA cash rate. Rates for fixed-term asset finance, such as that for Medical Equipment, move all the time as each bank continually adjusts for balance, costs, and risk. How to define their cost of funds remains a hot question. It’s easy to see what they’re paying for term deposits, the highest of which are currently 6.67% for three years and 7.34% for five years. But, what about the elusive international wholesale costs?
It appears that Westpac recently raised US$3 billion with the sale of bonds in the U.S. The three-year rate is 125 points over bank bills, and the five-year rate is 160 points over banks bills. Ninety-day bills are currently about 4.7%, so their cost is 5.95% for 3-year terms and 6.3% for 5-year terms. The interest rates currently applicable to Medical Equipment Finance are in the mid-8s for 5-year terms, so it all adds up to about a 2% margin over their cost of the U.S. bonds.
There are, of course, many other factors that affect their average cost of funds, but this at least clears up one aspect.