AOFM and ASF give update on forbearance SPV

The Australian Office of Financial Management (AOFM) and Australian Securitisation Forum (ASF) are finalising terms for a forbearance special-purpose vehicle (SPV), designed to provide relief to nonbank and small bank lenders with securitisation trusts affected by forbearance on loans as a result of COVID-19.

The forbearance SPV is planned to be administered as part of the AOFM’s structured finance support fund (SFSF), which is already investing in securitisation transactions in primary and secondary markets, and warehouse facilities. Its goal is to help bridge funding gaps for nonbank and small bank lenders created by COVID-19.

The ASF has been working closely with industry participants and the AOFM on the terms for the forbearance SPV. It has been advised by King and Wood Mallesons (KWM).

In a call with industry participants on 18 May, Chris Dalton, Melbourne-based chief executive of the ASF, revealed that the terms of the forbearance SPV are being finalised with a view to being operational by late June. He says terms provided by the ASF on 5 May have been broadly agreed to by the AOFM.

This outline describes a single SPV to cater to multiple lenders and asset classes. The SFSF will be the sole subscriber to a class A variable funding note with an interest rate of 5 per cent.

Participating lenders will subscribe to a class B note to provide credit enhancement. In the 18 May call, Anne-Marie Neagle, Melbourne-based partner at KWM, reveals that the amounts subscribed to by lenders in the class B note are intended to be segregated into a first-loss collateral account and amounts contributed recorded in individual ledgers, so first losses can be tracked by originator and amounts contributed are not available to other originators.

Eligible lenders will be able to draw down from the forbearance SPV until 30 March 2021 on loans originated before 30 September 2020, after which the lender will begin repaying the AOFM. The repayment period will be up to five years for long-dated assets such as mortgages and three years for shorter-dated assets including consumer loans.

The SFSF will fund up to 90 per cent of missed interest payments for a participating lender’s COVID-19 hardship approved claims. The remaining 10 per cent will flow through the originator’s trust waterfall.

Sydney-based portfolio manager at AOFM, Stephen Maher, revealed on the 18 May call that a collateral verification agent (CVA), to be appointed by the AOFM, will engage in ongoing monitoring of draws from the SPV to determine that lenders’ assets are eligible for investment.

He says viability testing will also be undertaken. “Viability testing will assess a lender’s cash-flow models as well as their experience so far with COVID-19 hardship claims, to assess the potential level of drawdowns from that lender as well as its ability to repay after 30 March 2021.”

The CVA and other necessary service providers to the forbearance SPV are expected to be appointed by early June, according to Dalton. They will give input on final documentation.

Neagle says a two-page summary provided by the ASF on 5 May has been expanded into a detailed terms sheet and is now being progressed into full documentation. She says the process for finalising the terms with the AOFM is being expedited, and that lenders that wish to be able to draw immediately should be preparing in parallel to be ready as soon as the forbearance SPV can be implemented.

SFSF update

In the 18 May call, Michael Bath, head of global markets and business strategy at the AOFM in Canberra, also gave an update on the broader operations of the SFSF. So far, the SFSF has made investments across asset classes in primary and secondary markets, as well as in warehouse vehicles (see chart).

Bath says the secondary market purchases undertaken by SFSF have two purposes: to enable investors to switch into primary transactions and to provide price discovery. The secondary market purchases made so far were done prior to primary market deals from Liberty Financial and La Trobe Financial.

Investors do not necessarily need to have like-for-like securities to enable switches, Bath explains. For instance, the AOFM has already conducted purchases of SME loan-backed securities to enable investor participation in residential mortgage-backed securities transactions.

Source: Australian Office of Financial Management 18 May 2020

The purchase of secondary securities ahead of a primary transaction also does not necessarily precipitate SFSF participation in the primary transaction, says Bath. This was in evidence through the SFSF’s absence from La Trobe Financial’s recent deal, which received enough third-party investor support without SFSF participation.

Bath expects the need for SFSF participation in primary market deals will decline further as price discovery becomes easier and as the forbearance SPV makes the impact of COVID-19 on securitisation pools less substantial.

The AOFM will provide updates on its investments in secondary markets and warehouse facilities on at least a monthly basis and more often should it be deemed worthwhile for price discovery purposes.

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