Mutuals dip their toe in pooled funding

Pooled funding vehicles are not new to the mutual sector. But some believe they may become more prevalent as smaller issuers grapple with the desire to engage with capital markets and the cost of going to market solo.

In November 2012, the Australian Mutual Investment Trust (AMIT) issued A$57 million (US$40.8 million) in an additional-capital transaction that was effectively a pooled securitisation of capital issued by 17 mutual banks. The deal was an attempt to work around the challenges inherent to mutuals in issuing convertible instruments.

Another traditional pooled funding model was offered by Cuscal. More commonly associated with transaction-banking services like payments, cards and ATMs, Cuscal also provides treasury services to mutuals that historically included pooled securitisation vehicles. The market has moved on and its last public deal was a A$699 million issue in April 2014, however.

While these options do not provide consistent access to wholesale funds for mutual authorised deposit-taking institutions (ADIs) – and the legislative response to the Hammond Review into the sector may render the workaround offered by AMIT redundant – the concept of pooled funding has not gone away.

“We’d love to see a centralised issuance vehicle come to market, which would allow the smaller ADIs to get economies of scale,” Rod Ellwood, general manager, debt markets services at Perpetual Corporate Trust, told delegates at the KangaNews Mutual Sector Wholesale Funding Seminar. “Treasury desks have to start thinking right through the spectrum of options because funding and capital are going to become increasingly expensive.”

Pooled funding is not an easy option. Cameron Rae, managing director at Laminar Capital, explained: “We have been working on aggregated vehicles for securitisation funding for a long time, but there are hurdles. The problem is bringing everything together. You can end up in a situation where you have made everything work to fit with rating-agency expectations but then something else doesn’t work. You fix that, and it breaks the rating. It’s not an easy nut to crack.”
Furthermore, mutual ADIs’ funding requirements are not necessarily fungible. “The biggest challenge for us is ‘the herding of the cats’,” Rae added. “Trying to get everybody to the same point at the same time – where they are mutually agreeable to issue at the same time – is probably the hardest part.”

Paul Williams, Heritage Bank (Heritage)’s chief financial officer, insisted that pooled funding vehicles are a “viable option” and one that issuers should consider as they strive for funding diversity. But he also suggested that it might not work for the larger players in the sector.

“In a pooled environment you are only as strong as your weakest link. For a name, like Heritage, that is at or close to being the highest rated in the mutual ADI sector, it probably makes more sense to go it alone for many funding options,” Williams explained.

Covered bonds

The central case for pooled funding is around additional-capital or securitised issuance. But there was some interest at the KangaNews event in the idea of aggregated pools paving the way for mutuals to issue covered bonds.

The scale of aggregation needed for mutual issuance would be considerable, however. To date, only five Australian banks have issued covered bonds: the four majors and the country’s next-largest bank, Suncorp. The level of overcollateralisation required to generate a triple-A asset has stopped covered bonds being economic even for the next tier of regional banks.

A pooled mutual issue is likely some way off. Rae revealed: “We have looked at aggregated covered bonds, but at the moment the complexity in the documentation is holding it back. Trying to pull together a simple, documented, multiseller covered bond really means starting from scratch and redocumenting just for domestic buyers. The mutuals are not going to do an offshore transaction.”

Ellwood added that the cost of issuing covered bonds has proved in general to be much greater than originally anticipated. An early assumption that the asset class would prove to be a more economic route to market than residential mortgage-backed securities has proved to be too optimistic.

“This is partly attributable to the higher degree of overcollaterisation required and some of the hidden costs associated with the funding structure, like the covered-bond guarantee swaps and collateral-posting requirements. These factors make it a more expensive source of funding than originally envisaged,” Ellwood said.