New funding approaches

Growing books mean a need to spread the funding net as widely as possible. Nonbank issuers say this can mean openness to new funding avenues including privately placed securitisation and whole-loan sales.

ZAUNMAYR As nonbank books grow, securitisation capacity could become an issue even with further offshore investor marketing. What other capital-markets options might be open to nonbank issuers?

GUESDE There is an interesting offshore trend which could potentially come to Australia: whole-loan funding. This has been done quite a lot in the Netherlands, for instance – which is a similar jurisdiction to Australia.

The whole-loan market is fairly stable, risk is well managed and there is an incentive to invest in nonbanks with a pickup based on the loans they originate. There is also regulatory arbitrage in the sense that an investor is better off having a whole-loan pool without tranches than it is buying a tranched structure.

I think this type of funding should be possible in Australia. In a way it is similar to what La Trobe Financial is already doing in that for part of its books it effectively becomes an asset manager – originating, taking a fee and finding investor interest.

BARRY It allows nonbanks to capture growth. The traditional model of originate to distribute, from warehouse to the term market, has a capacity limit. Whole-loan deals could be a solution for getting past this.

MARSDEN We are looking at the concept of whole-loan sales and we update our debt investors on these types of discussions.

The challenge is that it would represent a big move away from what the business currently does. The reality, though, is that residential mortgage-backed securities have a somewhat clear capacity limit.

Other types of secured funding, such as master-trust structures or even some sort of covered-bond programme, could move the dial. Whole-loan deals would be a change in philosophy for most nonbanks. Getting comfortable with the idea would depend on how sustainable this market is. From what we see, there is a regulatory yield opportunity that European insurers are chasing.

GUESDE European insurers want long-term assets and are open to conversations around structure. There is a convergence of interest and liquidity is available in size. These investors can put €400-600 million (US$439.6-659.4 million) on the table – which opens up opportunities.

BARRY The format can also be tailored in a number of ways. But it is more capital-efficient for the purchaser to do it on a whole-loan basis than by buying a tranche of a deal.

GUESDE I am not saying the Australian market will follow exactly what others have done. But there is a trend in place and there are commonalities between the Australian and Dutch markets in particular. They are more alike than most people would imagine, so what is relevant in one could come up in the other in future.

The nonbanks will keep growing and in this context it is all about finding funding sources – because you cannot fund just from warehouses. You need more diversity.

I am also a strong believer in private placements (PPs) as a funding tool. They are a way to optimise investor appetite by adjusting the mix of assets and the structure. Some investors want low-risk, ultra-prime securities and some might want prime or near prime. A PP can be adapted easily and is a good way to bridge the gap between the local market and what exists elsewhere.

ZAUNMAYR Is issuance of PPs becoming a more significant component of nonbanks’ funding strategies?

MARSDEN It isn’t part of our core strategy. It is more of an adjunct to our requirements for duration funding. We have had a couple of PP transactions where we have been mindful of not disrupting the supply profile to the public market.

RIEDEL We have done some PPs. These are always done purposefully and strategically to enhance the longevity and durability of our programme. We don’t think about them as one-off transactions, though, because they extend our funding strategy. To the extent that we get reverse enquiry we will consider PPs. But they need to add long-term value.

BARRY We’ve not done PPs but it is something we have as a contingency if required. It could be complementary in certain situations, but we need to be careful in how we manage our investor base between public and private markets. Strategically, PP is a good option and can tap into some bespoke pools of investor demand on a need basis.

GUESDE PPs work as long as the issuer is consistent and its deals are integrated in a global approach. Investors are making a clear decision between yield and liquidity. Sometimes they will want volume and a bit of yield pickup and so would be ready to explore a bit more asset concentration. This demand cannot be serviced with standard transactions. But equally, doing PP transactions should not be a one-off for an issuer.

TWYFORD Whole-loan sales and PPs are pillars in our funding strategy. We are a proponent of both and see them in a positive light. It is the same with public issuance, in the sense that it is about making sure we have the right strategy to achieve our needs.

Any one of these tools used in an unthoughtful manner is not necessarily going to deliver the optimal result. But if you have a strategy laid out for what you are doing, why you are doing it and how you are going to do it, they can be complementary tools.

This said, these things don’t necessarily work for everyone and we can understand others having differing views. However, we have our own strategy and we see these funding tools as something positive for our path. We expect to see them forming part of our overall funding platform going forward.