A new paradigm for warehouse provision

A major positive for Australian nonbanks has been the proliferation of domestic and international banks that are willing to provide warehouse facilities. Borrowers say they are discerning when it comes to selecting from where to source warehouse funds.

ZAUNMAYR Does the proliferation of warehouse availability compensate for the apparent limits on capacity for public securitisation in the Australian market?

TWYFORD Warehousing is a critical part of the overall funding mix. A core group of Australian banks has supported the Pepper business for a number of years. The scale of the Pepper business, however, requires diversification – and this includes growing warehouse capacity.

Instead of knocking on the same doors, we have sought – as I’m sure many others have – to diversify our counterparties. This has seen us add a number of offshore banking partners.

Each lender has its differences and preferences. As we diversify our partners we are seeking to find the right mix of banks that can provide us with depth of capacity on the right kinds of terms – ideally also bringing into play additional distribution and capacity in different markets.

It is ultimately important to be comfortable with the people we deal with. We want banks with real appetite to support us and the broader Australian market, and we certainly don’t want to be chasing them. It comes down to a trust factor.

The people we deal with are, invariably, people we have known for some time – on- and offshore. We can develop confidence around who they are and how they act. This is how we have gone about selecting our new counterparties.

BARRY I don’t think it is a secret that there are more international banks looking at the Australian market. We enjoy good support from three of the four Australian major banks, we talk to international banks and we have a large panel of warehouse providers.

We manage this on a conservative basis in order to keep some liquidity for a rainy day. It is encouraging that the international banks want to engage and we are happy to entertain their interest.

RIEDEL Our approach has been and will always be to create long-term, sustainable partnerships. We currently have five funding partners and receive pitches from time to time. The main factor we consider is whether there is an alignment of interests so we can be in business partnerships together for a long time.

There has been a lot of change in the last couple of years with European, Asian and US banks establishing operations in Australia – often by picking up resources from other institutions. There is more liquidity available in warehouse funding today than there was a couple of years ago. However, we remain selective about with whom we partner.

MARSDEN Resimac’s stance is similar. It is the most sensitive part of our liability business. All our warehousing relationships, whether longstanding or new, also reflect our aspirations for bond distribution.

We need to have comfort that banks are committed to the Australian nonbank market. The size and composition of warehouses has always been a function of our RMBS duration and funding objectives. I don’t think you would see any of the established nonbanks taking up a warehouse facility at the expense of size and frequency in their residential mortgage-backed securities deals.

BARRY I am consistently hearing that warehouse tenor available to nonbanks generally has extended in recent years. This is an important difference between the pre-crisis environment and now. The certainty longer-dated warehouse facilities offer supports the sustainability of the growth nonbanks are experiencing.

ZAUNMAYR Is the extra tenor being made available primarily by new or established warehouse providers?

BARRY New and established warehouse providers have provided long tenor, which is a critical development in the nonbank funding model.

MARSDEN Duration is something we increasingly value internally. But it has an upper limit, given the life of our assets.

GUESDE The risk appetite of banks is also a constraint, of course. If you have a five-year warehouse – which does not exist yet – the bank is taking on a lot of risk because there is no repricing.

What is interesting with warehouse tenor extension is that it only really started after Pepper, La Trobe Financial and Bluestone were purchased by private-equity firms. Some banks saw this and took a more positive view of the market. This started a virtuous circle.

There are a lot of warehouse offers out there nowadays. It is up to the market to see how all of the banks can add value. All the issuers are managing this in a sound manner through tenor and their levels of facility usage. It could be an issue if nonbanks were using 80 per cent or more of the capacity, but this is not the case. Banks can come and go but the way nonbanks are using warehouses makes the sector quite safe.

DAVISON When a new investment bank offers a warehouse facility, is there any science behind the decision to trust the lender’s commitment to the market?

RIEDEL Yes and no. When investors look at our transactions they think about our track record. They look at the nature of our customers and how they perform, and they make a considered investment decision at every part of the capital structure. The way we think about funding partners is exactly the same. We look at the track record of the institution globally and domestically.

BARRY Tenor is one of the key mitigants for this sort of risk, though. There is a more sustainable collection of banks operating in Australia now and nonbanks are using this funding in a more prudent and planned way than ever before.

MARSDEN The only thing I would add is that it is not just about the availability of balance sheet. It is also a question of what a bank like Natixis can offer in our offshore strategy, marketing and distribution. For Resimac, offshore distribution is probably more important than availability of balance sheet.

RIEDEL Definitely. We need to consider the full breadth of a bank’s offering.

GUESDE It is about how you make a difference with your clients. You need to have a better service and add value. We are all lending money and it’s always possible for someone else to be cheaper than we are. So it is about the way we present and organise. What we are offering is fundamentally an originate-to-distribute chain, which means we are playing the same game as our clients.

Without the warehouse the market take-out does not make sense. The take-out means the ability to find investors, create liquidity in the secondary market through the trading desk and give access to foreign currencies, as well as the fact that it is fully integrated. With the right partner, you can make one phone call instead of 10 to get a certain result.