The collapse of Sydney-based property developer Bathla Group, which carries more than $3 billion in liabilities, has been described as a "hammer blow" to the private credit market, according to a Morgan Stanley banker in Australia. This event is seen as a crucial test for the industry, which expanded significantly in the 2010s due to rising property prices and cheap money, but is now facing the challenges of higher interest rates and a housing market downturn. The incident underscores the vulnerabilities within this $144 billion private credit sector.
Bathla Group owes known creditors approximately $3.4 billion, including $3.08 billion to secured lenders and $130 million to other unsecured creditors, in addition to $145 million to the Australian Taxation Office and $42 million in land tax. This substantial debt load and the company's financial distress led to administrators being appointed. The administrators have warned that construction across parts of the business could halt unless fresh funding is secured, with an estimated weekly cost of $1 million to $1.3 million to keep projects operational. This cash shortage has also impacted employees, with about 21 staff and subcontractors stood down and $4 million owed in wages and superannuation.
The developer's troubles are attributed to a confluence of factors, including rising construction costs, stricter quality controls, and a shift in banking practices where banks prefer to lend against existing homes rather than new construction. This has pushed developers like Bathla towards more expensive private credit. The introduction of mandatory Decennial Liability Insurance (DLI) or a 2% bond in NSW, just 11 days before Bathla went into administration, further strained the company's liquidity, as insurers conducted rigorous audits and lenders became hesitant to roll over debts. This situation led financiers to see that either the expensive insurance or the bond would drain Bathla's cash, prompting them to refuse debt rollovers and triggering the administration.
The collapse is a significant setback for national housing supply and affordability, as Bathla's stalled pipeline of 14,000 apartments represents about 18.5% of new housing stock targeted for New South Wales this year. The company operated through hundreds of special purpose vehicles (SPVs), each with its own lender, creating a complex web of projects at various stages. This complexity means that private credit firms have exposure to these individual projects rather than directly to Bathla, leading to a fragmented response from lenders, some attempting to finish projects themselves while others are left with vacant land and plans, and none willing to fund Bathla's head office with its 165 staff.
Regulators' changes post-GFC, favoring real estate security over the future cash flows of property developers, also played a role in banks pulling back from this sector, thereby creating the space for private credit firms. Bhart Bhushan, Bathla’s managing director, also blamed the company's collapse partly on changes to capital gains tax and negative gearing in the federal budget, which led to a drop in investor demand for apartments.
