Athena enters the pantheon

Where many new lenders are seeking growth in areas they believe are under-served by the banks, Athena is going head to head with established players in the prime mortgage space. The company’s Sydney-based cofounder and chief operating officer, Michael Starkey, tells KangaNews how it is winning business through a true fintech offering – and how it will fund its book.

What can you tell us about Athena’s lending journey since its official platform launch in February 2019?

Our journey began two years ago. We spent the first year building the platform and we followed this with a very tight pilot which was completed ahead of an official launch in February this year.

There has been lots to keep us busy since February. One of the advantages of having a highly flexible platform is that we can respond quickly to customer feedback. Since launch we have already implemented dozens of changes, from credit policy to website design and amendments to our application flow.

In the meantime, the Reserve Bank of Australia cut the official cash rate twice. There have also been changes to Australian Prudential Regulation Authority (APRA) parameters as well as focus on Australian Securities and Investments Commission (ASIC) responsible-lending guidelines. In short, we are responding to a lot of flux in the industry.

We received very good publicity from passing on the rate cuts so quickly. The APRA buffers and some of the ASIC dialogue have also been helpful in shining a spotlight on the unintended consequences of tightened lending criteria. For example, people that already have a loan are finding it more challenging to switch to a better rate because they are having to jump through the same hurdles as applicants for new credit.

Athena is competing with the major banks on cost as well as service. How has the process of communicating the value proposition to customers been?

Consumer response has been very good. Volume has been tremendous: we have had more than 150 five-star reviews on Trustpilot with great customer feedback around the seamless process of applying for an Athena loan. We have also received some very good Google reviews.

Mortgage customers tend to be the most dissatisfied with major banks – with net promoter scores (NPS) of minus 20 per cent. At Athena we have consistently achieved an NPS north of 60 per cent.

Our hypothesis was that if we were to engineer a very good online application process, able to handle all the responsible-lending steps including assessment of mortgage serviceability, we would attract more people willing to apply for a digital mortgage. This hypothesis has proven correct. We are receiving a large number of applications after hours, for instance – as customers are able to complete the end-to-end process online.

It is also interesting that the vast majority of our applications are not from tech-savvy millennials but from customers who used a broker and borrowed from a major bank for their last loan.

In May 2019, Athena’s target was to originate A$500-700 million (US$336.5-471 million) of loans by the end of the year. How are you tracking?

This was the range we were targeting but I would be surprised if our actual year-end settlement total was not closer to A$800 million. Even with the volume that is currently in our pipeline we should beat our original targets.

We have had more than A$2.4 billion of completed applications come through and an additional A$1 billion in draft format. We have now settled more than A$300 million and will continue to settle around A$20-30 million per week for the next little while.

What are the funding implications of this growth and what sort of warehouse capacity does Athena have?

We have just drawn down on our second warehouse. Given business growth, we think we will require at least a third to be in place before the end of the year and we are well progressed in talks with several other domestic warehouse providers.

We are also finding a real resurgence of appetite for the Australian market from international banks. We have been engaged with around six or seven foreign banks and have a shortlist of two that we think will come on board either later this year or during the first half of 2020.

We are writing prime and super-prime mortgages. This is good credit to get comfortable with for an international bank that is taking a foray into a relatively new market.

“The vast majority of our applications are not from tech-savvy millennials but from customers who used a broker and borrowed from a major bank for their last loan.”

The next stage, presumably, is to term out into securitisation markets?

We would like to term out at some point in 2020 to recycle our warehouse capacity. But we doubt we will be able to do so via public term issuance until we have a rating.

If we were engaging in nonconforming lending we would be talking about years of track record to be able to get a rating. In the prime space, we believe we can achieve a rating in around three years from launch.

We are observing very strong appetite for securitisation at the moment – such that we think it will be possible to consider privately placing a term securitisation in 2020. We will start working on this in early 2020.

Would this type of private placement be a term structure funded by two or three large institutional investors?

Yes – investors that are comfortable playing in the mezzanine and senior parts of the capital structure. We have spoken to a number of mezzanine players that we think would be interested in this format. It would be unrated but would still enable us to recycle some warehouse capacity until we can publicly term out.

How much further away is a public securitisation deal?

We have not yet engaged with rating agencies to start the process of seeking a public rating, but we are about to begin these conversations. We are optimistic that we will receive a rating sooner rather than later given the quality of our loans, the transparency of our data and the ease of access to data on our platform in real time.

One of our key strengths will be how transparent we can be with our data. We envisage being able to provide wholesale investors with access to real-time portfolio-performance data on a daily basis.

Although we are an early-stage business, we have very experienced people as well as good data and system capabilities – and we are playing in a part of the market that is safe to begin with. These factors should provide comfort to investors.

Athena is also contemplating adding a mortgage fund and direct loan sales to the options in its funding suite. What is the importance of having several different forms of complementary funding in the toolkit even as a relatively small book?

We have big ambitions. The Australian market is worth around A$1.7 trillion in 2019 and it is expected to rise to around A$2 trillion in 10 years’ time. To reach just a 2-3 per cent share of this market would require A$40-60 billion of funding – and maybe we start to stretch capacity in the outer years of our plan.

It won’t be necessary to diversify beyond traditional funding channels in the first 3-4 years. However, we have taken the view that doing so gives us capacity and extra protection against dislocation in credit markets.

As part of our long-term strategy, we are already starting this journey by designing alternative funding structures – like our unit trust – and by thinking about what whole-of-loan sale arrangements would look like for different types of investors.

Our advantage is that we collect the data we need to allow us to tailor a debt offering to the needs of the wholesale investor right the way through from the application stage, because we have configured the platform for funding awareness. In other words, we are flexible enough to meet the individual investor’s needs whether they prefer to buy residential mortgage-backed securities, a unitised structure or a whole-loan sale.

How much interaction has Athena had with different types of investors?

We have started the process of engagement but have not explored all the options deeply. It is potentially an interesting time for investors like superannuation funds and insurers to be looking at this kind of investment proposition, though.

From what we have learned, there are a number of natural potential buyers of loans, including super funds and insurers as well as authorised deposit-taking institutions which are long deposits and are seeking diverse high-quality mortgage assets to fill a gap in the balance sheet.

Concerns about longevity are among the biggest question marks critics have about new lenders. Do you think the diversity in funding options Athena is putting in place also signals intent to be here for the long haul?

Athena is absolutely going to be around in five years’ time. We have been very fortunate with our equity backers – Macquarie Bank, venture-capital firms SquarePeg and AirTree Ventures, Hostplus and a range of other long-term investors. We have ambitions to build Athena into a substantial business.

It is absolutely not about flipping the business – and we won’t be carrying out an initial public offering in the near term. Nathan Walsh and I, as cofounders of the Athena business, are both very aligned to the notion of Athena being a long-term play.