The corporate loan market
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Australian investors are currently facing a conundrum when it comes to their asset allocation. With low rates and persistently low growth, finding reliable sources of return is becoming an increasingly difficult task.

Australia is in the lowest interest rate environment in history, with the official cash rate now at 0.25%. Reserve Bank of Australia rhetoric indicates that investors should prepare for an extended period of low rates, driven by stagnant wage growth, low inflation and high levels of household debt.

Against this backdrop, 10-year government bonds are trading very close to 1%, and the returns from cash and term deposits are insufficient for most investors - given the official inflation rate.

This low-rate environment means many investors are losing money on their fixed income holdings. This creates a challenge for those seeking to grow their assets and for those who are relying on their investments to generate an income, such as retirees.

As a result, many investors are looking beyond traditional fixed income for growth and income.

Investigating other types of fixed income

In times of market uncertainty, increasing portfolio allocations to defensive investments such as fixed income is a popular strategy for both preserving capital and generating income. This is because fixed income assets typically have a low correlation to growth assets such as equities and property, meaning they generally perform better in down markets.

The most well-known types of fixed income are government bonds and corporate bonds—debt securities issued by governments and corporations and sold to investors.

However, there is also a larger but lesser-known subsector of fixed income—corporate loans.

Corporate loans are loans provided to companies for various purposes, such as funding working capital requirements, expanding and purchasing assets, completing specific projects or for commercial property acquisition or development purposes.

These types of loans were traditionally provided to companies by the banks. However, this has changed as regulation has driven up the cost of bank funding, providing opportunities for non-bank lenders to fill the void. This is just one change in the wider transformation of Australia's banking sector brought about by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and a myriad of other global other changes.

The big four banks and their subsidiaries suffered a 10-percentage-point drop in market share in business lending and equipment finance over 2018/19 as their market share slid from 77% to 67%, while non-major lenders grew their share from 23% to 33%, mortgage aggregator FAST found in its 2019 Business Lending Index Report.

Further, total loans from the major bank lenders declined 12.5% from $4.07 billion in 2018 to $3.56 billion, while non-major lenders increased 42.4 % year-on-year to $1.77 billion. This trend is expected to continue, as businesses still need to borrow money despite the banks' pullback.

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