- Neither key financial market regulators, APRA nor the RBA, have mandates to engender competition into the funding of consumer lending
- The ACCC made a 2017 submission to the Productivity Commission Inquiry into the competition dynamic in the Australian Financial System. Its recommendations were largely structural and pertained to the retail banking landscape
- During the GFC, the Commonwealth Treasury via the Australian Office of Financial Management (AOFM) stepped into non bank funding markets by purchasing up to $16 billion of prime, term Residential Mortgage Backed Securities (RMBS) to provide support for non bank lenders who, almost uniformly, use the RMBS market as their primary source of funding. Given serious market dislocation, had the RMBS market seized up, the Commonwealth perceived a meaningful source of competition to the major lenders would have evaporated. This was a milestone event for two reasons:
- A key actor, the Commonwealth, was motivated to maintain a funding landscape to engender competition in consumer lending responding, in no small part, to market failure
- Edification by Treasury of the importance of the RMBS market (in terms of the liquidity support to non-ADIs, RMBS are now integral)
- The Commonwealth did extremely well from holding RMBS: they bought and funded them cheap, watched the prices go up and backed a major margin differential. The taxpayer did very, very well. A classic example of government acting during a period of market failure, taking a longer term policy view, and creating good outcomes
So where are we 12 years later in the grips of a pandemic?
If you are on a good thing, stick to it....
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By edict from the Commonwealth in April 2020, the AOFM is going much further than its action during the GFC: to support non bank lending the $15 billion Structured Finance Support Fund (SFSF) has been established. Part of the SFSF’s focus is investment in mezzanine tranches of term and “Warehouse” transactions. Warehouses are the funding vehicle that non bank lenders use to parcel a pool of receivables before refinancing to the term RMBS or Asset Backed Security (ABS) market. Warehouses have different funders taking different levels of risk. Banks typically lend the least risky, followed by more risk for the mezzanine lenders and the most risk being assumed by the sponsor. FIIG likes the risk represented by mezzanine tranches: FIIG has completed mezzanine transactions into two ABS Warehouses: Zip Money and Workpac Group. Interesting that the Commonwealth likes them also. Further, the AOFM notes that “in light of an overhang developing in the secondary market, a distortion in pricing has emerged that is likely to weigh on sponsors’ capacity to attract third party demand to new primary market issuance”. The AOFM have acted and like the GFC, via the SFSF, the AOFM has co-invested in term RMBS and ABS tranches and has recently supported a Firstmac transaction.
In 2019, the Commonwealth established the Australian Business Securitisation Fund (ABSF). With a mandate similar to the SFSF, the ABSF, via the AOFM, will:
- Fund new and existing warehouse facilities for SME loans alongside the private sector; and
Buy and hold term securitised SME loans in order to support segments of the market where there are identifiable gaps
The ABSF/SMSF has already made a $250 million investment in Judo Bank’s (an SME lender) warehouse.
From an issuer perspective, FIIG can assist first time and repeat issuers access the AUD unrated debt market and have collaborated with many Australian major banks in arranging warehouse structures both in the capacity of lead arranger and placement agent in the following areas:
FIIG Private Debt placement service as part of a structured financing solution in deal sizes of $10m-$25m; or
FIIG Debt Capital Markets via our $25m+ unrated bond arranging service.
Please get in touch to discuss.