Keeping warehouses stocked

One of the biggest funding challenges for nonbanks during the financial crisis was the retreat of warehouse providers from the Australian market. Liquidity appears to have held up rather better this time around.

ZAUNMAYR Has there been any change in warehouse relationships so far this year?

SCANLON We are certainly talking more. A lot of work gets done by all parties to set up a funding programme and, once they are established, it can often turn into the business as usual of reporting. But now there is a lot more ongoing communication.

This has been really good. Our funding partners have been great to work with and have given us valuable information on credit and origination markets in exchange for our extra reporting. Everyone is looking for more information at the moment and we are part of this chain as well as a beneficiary.

ZAUNMAYR Warehouse funding has been a competitive space in recent years. Has the COVID-19 crisis prompted any withdrawal of liquidity?

TWYFORD A number of our facilities have been in place for a long time and we have not been looking to grow them materially, so we have not had to search for incremental liquidity.

There has certainly been a lot of enquiry, particularly from offshore banks, in recent years. There was a period in the middle of this year when these enquiries went quiet. However, in recent weeks we have experienced reverse enquiry from offshore banks looking to see if we have any requirements.

Investors are also still trying to come into the mezzanine space. As an issuer, we need to be confident on the alignment of interests between our organisation, the senior funder and mezzanine funders when setting up any new facility. It needs to be a marriage – and we like to think of marriages as long-term arrangements. They can certainly be very expensive if they do not work out!

Banks have been under a lot of regulatory pressure to beef up their capital bases and be more liquid. They are now being called on to rescue and support the economy, and they are flush with liquidity. The focus now is on price.


ZAUNMAYR How does the provision of warehouse liquidity now compare with the position in the 2008 financial crisis?

BARRY There has been massive liquidity in the local banking system and it is similar offshore. As a result, we have not seen any liquidity pressure from our bank panel.

There has been a large increase in bank term deposits in Australia, which has meant the banks have had a limited draw on the Reserve Bank of Australia’s term-funding facility so far. Their liquidity positions are very strong and we have had good dialogue with our panel banks, which remain very supportive.

TWYFORD I think the fact that it is not a financial-driven crisis this time around is the key element. The other point is that the banks’ capital positions have completely changed since the financial crisis, as a result of a host of new regulations.

Also since the financial crisis, real-money investors have become our predominant buyers – and they have funds to deploy. While there was some choppiness in the early stages in March and April, as superannuation investors faced liquidity squeezes, fundamentally all the real money has stayed put.

Investors took the time to assess the market and become comfortable with its foundations and assets. Since deal flow restarted they have come back in substantially.

AUSTIN At the time of the 2008 financial crisis, there were only two parties in the warehouse arrangement – the warehouse lender and the issuer with the seller note.

This time around, third parties are involved with mezzanine funding. Without AOFM [Australian Office of Financial Management] support for mezzanine warehouse funding, this crisis could have become a lot messier.

GUESDE During the financial crisis, banks’ balance sheets were oversized and there was too much reliance on liquidity. It took time for central banks and governments to react to this. The question at this time for everyone was whether there would be enough liquidity. It was not a question of price, just availability. Banks were the weakest part of the chain and had to be salvaged.

It is completely different now. Banks have been under a lot of regulatory pressure to beef up their capital bases and be more liquid. They are now being called on to rescue and support the economy, and they are flush with liquidity. The focus now is on price.

In Australia, a lot of ADIs [authorised deposit-taking institutions] have relied on the US dollar market for funding because there is not enough domestic currency to fund the banking system. This was exacerbated in the financial crisis, when flight to quality meant everyone wanted to hold US dollars. The swap market then went crazy and US dollar liquidity costs rose dramatically. This showed the importance of currency diversity for nonbanks as well as banks.

In this crisis, all countries are being hit at the same time and some sectors have completely stopped. In Australia, the nonbanks have reacted in a way that has almost appeared coordinated. There has been full transparency on the level of hardship and ongoing origination. This is helpful, and we have heard from investors that they have been amazed by how consistent this has been in the sector.

Hardship levels have come down, as was expected and communicated, so there is also consistency on what has been shared and the outcomes seen. With support from the AOFM in securitisation, and the government in the wider economy, it is a very positive environment.