Pepper spreads the net

Pepper believes its diverse product offering and global reach put it in the best position to navigate the challenging waters of 2020. Andrew Twyford, Pepper’s Melbourne-based treasurer, explains how.

The scale of Pepper’s global business is unique in the Australian nonbank sector. How has the group gone about managing its global funding in the COVID-19 era?

We have a coordinated global funding strategy including ongoing dialogue with our investor base, centrally managed through our Australian team. These ongoing discussions with investors inform our issuance plans and schedule. This has continued during the COVID-19 period.

Asset-class and currency diversity gives us access to a really wide investor universe. These discussions have enabled us to introduce Australian options to offshore investors that may have been more focused on one of our offshore platforms. This is one of the main means by which we have built out our investor base over the years.

How does global appetite for Australian assets compare with international equivalents?

Demand for UK residential mortgage-backed securities (RMBS) has been strong but supply has been limited as bank issuers are funding via other means. We have completed two UK deals in the past eight weeks, both of which had pleasing results. This is despite the fact that the UK is facing more potential headwinds.

The global investor base certainly views Australian housing as a strong and stable proposition. Concern about the Australian housing market was really when it continued to grow uninterrupted – it was around when the bubble was going to burst. We saw house prices drop roughly 10 per cent in Australia from late 2017 to mid-2019 and then, up to April 2020, bounce back close to the prior peak. The market view is that any falls as a result of COVID-19 are not expected to be as much as the recent drop, which should further underpin a positive view of Australian assets.

A year or so ago, one of the main questions for Australia’s biggest nonbanks was whether funding capacity was an inhibitor of growth ambitions. Is liquidity a constraint on growth in 2020?

Emphatically, no. Liquidity management is a focus for all lending businesses, but Pepper certainly has more than enough capacity to fund even our stretch targets over our forecast period. This is while maintaining significant liquidity buffers.

Excess liquidity in the Australian financial system is making the major banks aggressive in their loan pricing. Does this move the dial for Pepper’s growth aspirations or specific areas of focus?

We can originate a very diverse portfolio of assets, which is a good starting point. The larger bank lenders’ appetite tends to ebb and flow – including getting very aggressive in times like these, when volume aspirations have not been met.

What the major banks tend to do is get their brands at the front of borrowers’ minds by offering very eye-catching headline rates. At the same time, however, they can alter their credit scorecards so the volume they receive may not align directly with the rates they are offering.

This can result in disappointment for some borrowers and for the brokers that are helping the borrowers find the right product and who make up such a significant part of the marketplace nowadays. What borrowers and brokers both like is certainty – knowing they will get a loan at the rate they expect.

When this doesn’t happen, we think it opens an opportunity for Pepper – especially thanks to our breadth of offering, turnaround times and consistency of credit.

In the longer term, COVID-19 will see some borrowers moving into the near-prime space, for instance – of which we were the initial architect. We have a cascading credit model that naturally suits borrowers looking for certainty in an uncertain marketplace.

How would you compare origination and asset performance in Pepper’s other lending books to the mortgage space?

We have been really pleased with growth in the asset-finance business, which has just passed A$5 billion (US$3.6 billion) of assets settled. It is a growth opportunity for the Pepper business and we did our first public securitisation from it, under the SPARKZ banner, in 2019.

We have maintained origination volume at close to the pre-COVID-19 level and any volume adjustments were about making sure we had the right credit settings in place. As we get more economic certainty we can start to return these settings to where they were before the pandemic, although this will take a little while to play out. We certainly expect to be back to pre-COVID-19 volume by the end of 2020 ahead of a strong growth year in 2021.

We have also just added a novated-lease product, which we look forward to rolling out more broadly in the market and which will help us further grow the motor-vehicle asset book.