La Trobe Financial spreads the funding net

Martin Barry, La Trobe Financial’s Sydney-based chief corporate treasurer, shares some views on the lender’s specialities and an unusual – and diversified – funding structure that takes the pressure off its securitisation programme.

Can you give an update on La Trobe Financial’s funding approach?

Our unique funding model is based on three distinct arms: retail funding from our A$2.5 billion (US$1.8 billion) Australian Credit Fund, bank warehousing and institutional-investment term mandates, and our capital-markets programme.

Unlike other nonbanks, we do not need to be in the market five times every year but have the benefit of being able to choose the best times to activate our capital-market issuance. This means we will be in the market twice each year.

We have the option to do larger deals when pricing is attractive, and when it is not as attractive we can scale back or not issue at all if appropriate.

Our last residential mortgage-backed securities (RMBS) deal, at A$750 million, indicates a scale up in origination but opportune timing and pricing point were the main causes of the upsize. In our view, circa A$750 million will be our forecast benchmark size going forward.

La Trobe Financial has made particular efforts at investor engagement in south-east Asia. Where have you focused your efforts?

We visit Asia on a regular basis and have offices in Hong Kong and Shanghai, so we are engaged with investors on a continuous basis and on a number of fronts. This continuous dialogue is helpful, and investors are engaged and willing to talk.

Blackstone Group (Blackstone) also has a regional hub in Singapore, so our partnership with Blackstone has been very useful in making additional connections and introductions with Asia-Pacific-based institutional investors. When regional investors saw the news about Blackstone and La Trobe Financial they viewed it as credit and ratings positive and were prepared to look closer. It is a similar story with new investors in Hong Kong and Tokyo, which continue to take an interest.

Where is La Trobe Financial seeing the most opportunity and how is it planning to take advantage?

The opportunity is in continuing to be a disciplined specialist, servicing areas of the credit spectrum that meet our credit and risk requirements and in which other credit providers no longer wish to compete. What we have seen in the mortgage market in 2018, and what we expect to continue in 2019 and beyond, is that specialist lending sectors will continue to expand and grow.

Products like self-managed-superannuation fund loans, alternative-documentation loans, and our parent-to-child and aged-care products are examples. These are products that major banks struggle with because they have some complexity to the underwriting process and they require intensive manual underwriting. We think the opportunity lies in these specialist segments of the market rather than the super-prime product set.

Has demand for La Trobe Financial’s credit fund changed as Australia’s housing market has turned?

Our credit fund has actually grown substantially and we are experiencing continued stable net growth each month. There are a number of reasons for this.

First, we spent a lot of time telling the story of the credit fund and the conservative type of lending it does for our 35,000 retail investors. The loans are both residential and commercial, the latter generally being smaller loans for assets like small-business premises. The credit fund also has five independent ratings including from Lonsec, SQM, Australia Ratings, Zenith and Lipper.

The average loan-to-value ratio in the credit fund is currently 63 per cent and educated investors understand this is relatively low-risk credit. Property prices could decline but it doesn’t mean these loans would be under water.

The history and performance of the credit fund is now quite seasoned. It has been going since 1992 and has been through a number of property and economic cycles. The proof is in the pudding and it continues to outperform.

The final point is that the rate we pay investors in our 12-month term account is 5.2 per cent per annum – variable – which is favourable compared with what investors could get for similar duration in alternative credit products. We think the pick up in yield appropriately compensates investors for any additional risk.

Investors are cognisant that the housing market is cooling and valuations are coming off. But they also understand there are mechanisms built into the credit fund which will assist in protecting them in a downturn.