Lending and funding growth bank in focus for nonbanks

If 2020 was a story of resilience in the face of an unprecedented external shock for Australian nonbank lenders, this year has been about the return of growth in originations accompanied by perhaps the best-ever conditions in domestic securitisation. At a roundtable hosted by KangaNews and Natixis, issuers speak about their aspirations and funding consequences.

  • James Austin Chief Financial Officer FIRSTMAC
  • Martin Barry Chief Financial Officer LA TROBE FINANCIAL
  • Fabrice Guesde Head of Credit Markets and Global Structured Credit Solutions, Asia Pacific NATIXIS
  • Andrew Marsden General Manager, Treasury and Securitisation RESIMAC
  • Anthony Moir Treasurer PEPPER MONEY
  • Peter Riedel Chief Financial Officer and Company Secretary LIBERTY FINANCIAL
  • Paul Scanlon Chief Executive Officer PRIME CAPITAL
  • Laurence Davison KANGANEWS
  • Milos Ilic-Miloradovic Executive Director, Global Structured Credit Solutions NATIXIS

Davison Last year, we talked about how competitive the lending environment had become. What is the state of play in 2021?

MARSDEN It has been a very positive story over the last 12 months. Prime loans still account for approximately 60-70 per cent of our production and there has been a unique alchemy supporting origination opportunities in the front end: we have had a good credit environment that has been well supported by funding and capital.

At Resimac, we have seen a reduction of close to 80 basis points in our prime cost of funds, as far as our residential mortgage-backed securities (RMBS) pricing is concerned. This has been a fundamental contributor to our ability to compete with the major banks.

A year ago, there was uncertainty about how the lockdown was going to play out in the nonconforming market. But the benign credit environment also speaks to our success in being able to increase volume in the nonconforming space.

This has been fuelled by active capital markets, in which nonconforming transactions are pricing with only a 10 basis point gap to prime. This is a form of encouragement from capital markets, suggesting origination efforts in the nonconforming space should be sustained or even increased.

BARRY I agree with all these comments. The major banks are very focused on vanilla customers and the refinancing market. On the funding side, the effects of the TFF [term funding facility] are still in the market – providing ADIs [authorised deposit-taking institutions] very cheap cost of funds – but even these will dissipate over the next six months and into next year.

We are seeing hyper competition between the major banks for vanilla customers, but bank lenders are also struggling to process these customers as a direct result of the extra volume. In many ways, the banks’ focus creates opportunity for anyone with a more complex model.

Our business looks at the more complex but still prime borrowers. These borrowers do not fit into the major banks’ automated scoring models and we are seeing great volume of these customers coming to La Trobe Financial. Each month, we receive approximately A$1.2 billion (US$889.8 million) in applications and we are settling A$635 million. Volume wise, we are well and truly past our pre-pandemic level.

MOIR We are also seeing very positive growth in origination. Our fast approval times are providing a competitive advantage, though competition remains strong – particularly for fixed-rate lending, which now forms 40-45 per cent of the market.

MARSDEN Turnaround times have been another area in which we have been able to make our mark, as the banks have had approval times stretching to four or five weeks.

“Everything we see and hear from issuers confirms that every deal has added more investors or had new investors for the borrower. This is the case for established and new issuers. I think this is structural and will persist.”

Davison A couple of lenders have already alluded to the nonbank sector’s processing advantages. How material is this advantage, and does it imply lower credit standards?

AUSTIN A lot of our processing systems are automated so handling large volume is nothing new. Processing and efficiency are elements nonbanks have always competed on – it is our point of difference and it is in our DNA.

Many might think this means easy credit, but this is not the case. It is about processing efficiency and speed. Many ADIs choke up as soon as their volume increases by 5 per cent due to legacy systems and inherent inefficiencies. Nonbanks have been able to compete effectively on processing times. Banks are now taking 3-4 weeks or even longer to complete the process of a preliminary approval.

SCANLON We are also seeing origination at record levels – it is beyond anything we have ever seen or expected, and I agree this has been supported by challenges in ‘bank land’ where processing has been hard.

But equally I think this is a challenge all of us have had. Dealing with increased volume while keeping up with originations is hard. Hiring staff to help grow volume has also been difficult in the current environment.

Although our numbers show a lot of refinancing work, a great deal of our repayment has also been coming from property sales. We are currently seeing double our usual cash-flow rate.
When it comes to asset quality, we deal with self-employed and small-business customers – and we were initially very concerned they were going to be adversely affected by the lockdowns.

Fortunately, this was not the case. Despite a small spike at the beginning of the pandemic – when there was a large volume of requests for relief – our arrears numbers have largely been consistent with pre-pandemic levels, which we have found really surprising. Originating and underwriting quality has been more or less the same. 

RIEDEL Interest rates are really conducive, affordability is strong and, other than the uncertainty over lockdowns, ultimately borrowers have strong conviction in the sustainability of their income. All this leads to a strong environment for credit growth.

We have seen good momentum in new business. Echoing the group’s sentiment, the way Liberty Financial serves customers is superior to the banks. The best-interests-duty legislation was perhaps a little awkward to navigate, but I think it will end up being really positive – particularly since it means turnaround times are now publicly available.

Brokers have traditionally viewed some lenders as more aligned to customer service than others, but now performance is reported in black and white. Brokers can compare the performance of all lenders, and there is a stark gap between the service standard of banks and nonbanks – single-digit processing times for us and 20-40 days on average for banks.

This means our service standards are now front of mind. It is a really positive time to continue to grow the business.

“We are seeing hyper competition between the major banks for vanilla customers, but bank lenders are also struggling to process these customers as a direct result of the extra volume. In many ways, the banks’ focus creates opportunity for anyone with amore complex model.”

Davison Most of the lenders here are primarily active in the mortgage sector. What is the story in the personal-lending space?

ZILELI Last year was an interesting time. The origination experience varied by product to some extent but, generally speaking, originations were quite strong and remain so. We have multiple product lines that include cards, personal lending and auto lending. Autos performed well last year and are still doing so. Personal lending tapered off while we were in lockdown last year but it has picked back up and is quite strong at the moment, too.

The cards business has also been performing well. Origination remained solid throughout the lockdown last year particularly because of the ability to buy online and the strong demand in certain areas. For example, many individuals were setting up their home office or home school.

However, what we have noticed in the cards space is elevated customer repayments, reducing receivables. This is due in particular to government stimulus and access to superannuation withdrawals.

We experienced repayments across the portfolio in Australia and New Zealand, predominantly in the instalments portfolio. In consumer finance, where the loans are smaller, consumers are choosing to pay down rather than build up debt.

RIEDEL The auto space has been challenged over the past 18 months. The supply-chain bottleneck caused by a shortage of semiconductors has restricted supply of cars to the market, and what supply is available has been difficult to move since lockdowns have restricted consumer access to dealerships. Activity has been subdued since April 2020 but I see positive signs for renewed growth when structural impediments recede.

ZILELI Most of our auto lending is for used cars so we have not been as affected by supply-chain issues. This is why we saw an increase in our auto lending last year. Anecdotally, it seems the price of used cars went up last year as demand increased due to the new-car supply issues – and our business experienced strong growth as a result.

RIEDEL SMEs were probably the most challenged borrower type over the last 18 months, particularly smaller service businesses. We saw a reduction in credit demand in the mid-to-back end of 2020, but it rebounded leading into this last lockdown. It was a certainly a V-shaped recovery in the small-business part of the market.

Credit demand is subdued again now because of the latest lockdown, but I think small business in Australia is resilient. I expect to see a pick-up in demand when restrictions ease, just as we saw in 2020.

Davison How is Australia’s pandemic management and economic outlook viewed internationally?

GUESDE Australia was probably the country that managed the first phase of the COVID-19 crisis best. It had the means to support the whole economy through lockdown because it is a triple-A rated sovereign with very low debt-to-GDP. The government reacted very quickly to provide significant support to borrowers and consumers. Asia in general did well in the first phase, too.

The second phase has been more worrying. Australia and other countries in the region have been overly focused on the target of zero COVID-19 cases and, at the same time, they are also behind the European and North American vaccination rates. This is causing hesitation on how to get back to normal life.

Natixis’s economics team has looked at mobility data and economic growth across various regions. In Europe and the US, mobility has increased – and this correlates with economic growth. In Asia, including Australia but most importantly China, mobility is dropping due to new lockdowns. This is affecting economic growth forecasts.

“The payment sector has seen a lot of change and competition over recent years. We are yet to see this play out fully but we are experiencing the emergence of BNPL as a major new way of spending. There will be constant innovation, not just with products but also the customer experience.”


Davison The Australian dollar securitisation market has been a very positive environment in 2021, with record deal volume and pricing. Is this change structural or will conditions inevitably revert at some stage?

ILIC-MILORADOVIC As an institution that supports a lot of this risk, we have seen first-hand Australia’s relative outperformance economically and in credit since the pandemic began. This has been positive for all investors.

The various QE programmes have increased the amount of cash searching for assets while the lack of competing supply from banks – complemented by higher conditional prepayment rates (CPRs) and back books running off faster – has meant there has been more demand for risk in the nonbank market.

Furthermore, the assets being produced by the nonbank sector are performing much better than most participants expected when the crisis first hit. All these factors have helped increase market capacity

There has been talk about the TFF ending, and major banks and others coming back to the market. Nonetheless, everything we see and hear from issuers confirms that deals have added more investors or had new investors for the borrower. This is the case for established and new issuers.

I think this is structural and will persist. If an investor comes into a new asset class or a new name, it is – generally speaking – not going to complete the credit work for a one-off deal. It has done the work and become comfortable with the view so will probably look to participate again.

Competing supply of assets from banks and other nonbanks as their books continue to grow will have an impact on the market, but structurally the number of investors in junior and senior tranches has increased – and this should remain.

Davison Is this a global picture or is Australia an outlier?

GUESDE It is a global picture. Most developed economies across the world have reacted to the crisis along the same lines. The end effect is that massive cash injections have occurred everywhere. This cash has not been fully invested in the real economy.

Investors globally are full of cash and looking for ways to use it. In fact, to a certain extent this has been happening in Europe for years. Central banks are providing alternative funding sources that are much cheaper than any other type of debt. The questions are whether this can last and what happens when the music stops.

At present, lack of bank supply is a global phenomenon – with the exception of the US. The trend is certainly the same in Asia and Europe, where lack of alternative supply is playing a big part in the market. At some point banks will be back, of course – it will be interesting to see what happens then.

For now, the share of foreign investors in Australian securitisation is growing. This is even though most Australian transactions this year have been in Australian dollars rather than denominated in foreign currencies. Meanwhile, few European investors have been prevented from participating despite new European regulations. We have seen an increase in foreign investors in almost all transactions executed this year.

“The growth of nonbank issuers means I do not think they can ignore offshore markets and foreign currencies. Issuers have to be engaged because they never know what the future holds. As they grow, they need to diversify currencies and funding sources.”

Davison What are the issuers’ perspectives on market capacity relative to before the pandemic?

MARSDEN Like a lot of other nonbanks, we need to issue throughout all market cycles. As far as capacity is concerned, we put a reasonable amount of work into ensuring we have alternative issuance options in other markets. The jewel in the crown for Resimac is our US dollar 144A programme.

We are seeing solid demand in the domestic market, and I think the dynamics driving this are still present. In fact we were not expecting the extent of the demand that is apparent for triple-A nonbank paper in the second half of this year. The volume and quality of deals executed over the last 2-3 months is reflective of market health.

RIEDEL This is a good summary and it is a trend that has been consistent across the last couple of years, particularly for global allocation. Our most recent transaction was distributed almost 50-50 between domestic and offshore investors, with a good mix of European and Asian engagement.

The names may change from time to time – although actually not too often. Either way, the engagement investors have with our offering remains robust.

Davison A couple of years ago some nonbank issuers were coming close to what they thought might be name limits for securitisation in the Australian dollar market. Is foreign-currency issuance likely to come back on the radar on this basis?

MOIR Yes. We are not comfortable relying on domestic market capacity. Our strategy is to approach offshore markets periodically and maintain our presence in those markets.

I think the Australian market has become structurally larger, though. We certainly hope the new names participating in our programmes will continue to invest over time.

I am a bit hesitant to say whether the domestic market will see a permanent shift to its level of demand being as strong as it has been recently, given the level of liquidity we are experiencing from influences such as the TFF. We can be hopeful, but I expect there will be some pullback. 

GUESDE Investor appetite for Australian dollar securitisation means it is not surprising issuers have executed a lot of transactions in their home currency. Domestic and international investors have been subscribing massively.

Pricing is pretty competitive in foreign currencies, and the basis has reached historically low levels. For example, the three-month LIBOR – three-month BBSW basis has probably tightened by 20 basis points from 2019 levels. However, even adding the 20 basis points does not make the outcome super exciting for issuers when compared with Australian dollar execution at the moment.

On the other hand, given the growth of nonbank issuers I do not think they can ignore offshore markets and foreign currencies. It is a question of consistency and persistence. Issuers have to engage because they never know what the future holds. As they grow, they need to diversify funding sources and currencies.

Last year we saw issuance in yen, which was quite interesting. This brought new investors into play and took advantage of the basis. Foreign-currency issuance has to be part of any issuer’s long-term strategy once it reaches a critical size – and many nonbank issuers have reached this size.

Many issuers that were happy to take A$250-500 million deals four or five years ago are now doing A$1-1.5 billion. They still need to keep issuing regularly, though – so foreign currency provides another option.

The fiscal cliff that never came and 2021 lockdown impact

Even as loan books continued to perform in 2020, some observers insisted problems would come when some aspects of government fiscal support rolled off in the first half of 2021. This deterioration never eventuated, and lenders also say the latest wave of lockdowns has not yet sparked major asset-performance concerns.

DAVISON A year ago we were talking about the so-called fiscal support cliff, primarily what would happen when the JobKeeper programme was no longer available. This seemed to pass with no problems, but now much of Australia is back in full lockdown without the same support packages – and yet the degree of concern we heard in 2020 does not seem to apply. Why is this?

SCANLON Around the middle of last year we were very worried about our book’s exposure to self-employed and small-business borrowers. The fiscal cliff was playing on our minds and we were worried about what would happen after Christmas. So we began to scale back loan-to-value ratios (LVRs) and origination overall, and braced ourselves for a challenge.

But nothing happened. In fact, things got better. We saw great business, more origination, everyone was paying and arrears went down. We were completely wrong about what would happen after the 2020 lockdowns. I hope we are not wrong about this one, but at the moment we are not experiencing any problems.

Ilic-Miloradovic Are nonbanks that have in the past been programmatic foreign-currency issuers maintaining engagement with these investors while the Australian dollar option is so strong?

MARSDEN We keep our US dollar programme primed and we issued in March this year from our prime programme. We haven’t issued under our nonconforming shelf in the US dollar market since 2019, but we have something in the wings for later in the third or the fourth quarter.

There is quite a sizeable differential in landed cost of funds between foreign-currency and Australian dollar issuance so we need to justify foreign-currency issuance internally. Our board recognises and accepts the cost of maintaining infrastructure for contingent capacity.

MOIR It is very unusual that Pepper Money has not issued in the US market for about 18 months, but I think it is understandable given the circumstances of this time period. It is a very important market for us to maintain a programmatic approach to, and we are aware of our absence. We will return as soon as it makes sense to do so.

“Credit demand is subdued again now because of the latest lockdown, but I think small business in Australia is resilient. I expect to see a pick-up in demand when restrictions ease, just as we saw in 2020.”

Ilic-Miloradovic Firstmac has diversified issuance through its green and Eagle programmes. Is expanding the range of programmes one way of increasing overall funding capacity?

AUSTIN All funding alternatives are useful, provided investors are incremental to the loyal names we see in our regular domestic programme. Private placements are great if they find new investors or incremental funds as the main objective is managing available limits in the public market.

I would say the same about whole-loan funding. It is a different product type, which is fine, but is it finding an incremental investor? Is it someone that would otherwise be putting the same money to work in a public RMBS or ABS [asset-backed securities] transaction?

Programme capacity goes to how many times each year we are going to be in the market. Obviously, we can be in the market more regularly if we have multiple asset classes and programmes.

Ilic-Miloradovic What are some other alternative funding sources nonbanks are using or thinking about?

BARRY The main alternative source for La Trobe Financial is our retail-credit fund, which has 55,000 investors. They invest through a variety of options, the flagship one being a 12-month term account.

It has been a well-established product since 1989 and continues to grow. The retail-credit fund has A$6.5 billion in assets under management today and we are seeing about A$200 million a month of inflows to this funding sleeve. It is really advantageous for us, as are the other well-established funding segments. 

GUESDE What we see and hear is there are several ways to fund a business. We have heard quite a few issuers thinking about the asset-management angle – and this relates to where nonbank businesses will be in the long run.

Nonbanks have expertise in managing assets, so being formally an asset manager is a natural evolution. Structurally it is not easy, but it has the benefit of getting the cash before deploying it.

Nonbanks can then recycle their warehouses and use them as a liquidity backstop. We see more issuers thinking about the whole-loan approach, which is the same – they secure funding and then effectively become an asset manager.

Something we have only discussed briefly is the private placement. The frustration we see on the investor side regarding size of allocations will likely lead to more opportunities for private placements in the long run.

Davison Is the state of the public securitisation market making Prime Capital think differently about public issuance, given it has not yet entered the market?

SCANLON We have no pressure from our current investors to term out funding. In fact, they like the warehouse position we are in right now and are keen to leave it as it is.

As an organisation, we are very busy processing loans. It is all hands on deck to ensure we provide a good customer experience. If anything, this means we have kicked public securitisation down the road a little bit, though no doubt it will be on the radar soon.

Davison How closely are issuers watching the major banks’ return to more regular Australian dollar funding, and has there been any feedback from new securitisation investors on how sticky they might be when this alternative source of quality credit comes back?

AUSTIN I cannot see the volume of issuance from nonbanks this year being repeated. I am concerned about name limits and what happens when the banks start to come back. I think it would be naïve not to plan for this – and it is probably not far away.

It is good that new investors have come in, and hopefully they have a good experience and are retained. But it is likely these ticket sizes will shrink, given nonbank and single-name exposure may be high.

BARRY I have not had any direct feedback from investors. As everyone has mentioned, this year we have had good demand from the buy side: the attractiveness of Australian collateral is obvious and investors like our market. All the great work that has been done educating investors, and the transparency of engagement we all have with them, has paid off.

I agree that we need to be aware of the impending return of major banks but I do not think we will see a crowding out in the short term. This will play out over 2022.

The positive side is new investors are looking at this market and there are other alternative funding sources, such as our A$6.5 billion asset-management business.

GUESDE With Australian banks not accessing the market in the last 18 months, offshore investors in, for instance, Japan – which used to invest massively in Australian major banks – have started to look at nonbanks. Initially they were only looking at prime assets but they are now also considering nonconforming. These investors typically take a long time to start buying, but when they have approved an issuer they tend to come back.

The other good news is the oversubscription we are seeing in deals is massive. Investors are putting in big orders because they know there will be scaling. Once the banks come back this could play against the nonbanks to a degree, but we have found the moment an issuer increases margin by 10 basis points investors will be there. The hunt for yield is still in play.

I am not sure whether we will see further margin improvement but pricing has been very strong, so there is flexibility. I think the market itself will probably rebalance, but investors have made the effort to understand the credit and it will only take 5-10 basis points to get them back if there are issues with competing supply.

“Prime loans still account for approximately 60-70 per cent of our production and there has been a unique alchemy supporting origination opportunities in the front end: we have had a good credit environment that has been well supported by funding and capital.”


Ilic-Miloradovic Several nonbank lenders here have listed on the ASX since this time last year and there is talk about further listing activity in the nonbank sector. What made timing right for Liberty, Pepper Money and Latitude Financial Services and what benefits are you seeing from listing?

ZILELI There are many obvious benefits, including access to capital and funding diversification. But I think it takes time to see some of these benefits come through.

It was more than just the listing for us. We restructured the group into a traditional corporate structure and this has enabled us, for example, to take on a corporate debt facility that was not available to us previously. We have also issued our inaugural A$150 million capital note: a perpetual, subordinated, unsecured security.

We are thinking about various strategic goals and the listing was the first step to delivering them. We will continue to work through the availability of other funding sources and opportunities, and we also recently announced an acquisition. There is plenty of corporate activity at Latitude, in other words.

RIEDEL I think the benefit is intangible. There is negligible crossover between equity and debt investors so being listed has no real benefit for debt investors other than, perhaps, continuous disclosure. As a listed company, we disclose more detailed information and more frequently. Investors are focused on partnering with issuers that are transparent, so this is important and helpful for them.

The timing was challenging. If someone had asked me at the beginning of last year whether we would be listed at the end of it, the answer would have been “no way”. But Liberty has a culture and history of taking advantage of opportunities as they emerge. It just so happened the equity market was conducive to a listing in late 2020. We were ready and able to execute.

MOIR The market conditions were right for us, specifically positive valuation and execution certainty. I echo the idea that there is no major change for debt investors other than a positive perception that comes from continuous disclosure.

Lessons from, and divergence in, New Zealand

Several of Australia’s largest nonbanks have significant New Zealand asset books. Lending and funding markets have similarities across the Tasman Sea, but they have also arguably diverged more than ever during the pandemic period.

DAVISON New Zealand experienced explosive housing growth last year. What observations do lenders have from their New Zealand books and what lessons can be learned from recent experience in this market?

RIEDEL The market is more strictly managed in New Zealand than it is in Australia. My feeling is New Zealand regulators see very little difference between a nonbank and a bank. Even if nonbanks do not have the strictest regulations, we feel their impact indirectly.

It is far more difficult to find pockets of customer support in New Zealand than it is in Australia. As a result, credit growth has been more challenging.

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.


Ilic-Miloradovic Where are the main growth opportunities for nonbanks in the short-to­-medium term? Is the focus likely to be on organic growth – taking market share from the major banks or shifting into adjacent areas – or inorganic growth?

ZILELI It is a mixture of organic and inorganic for us, with the Symple Loans acquisition an example of the latter. An important element of the Symple acquisition is the technology and digital offering.
We are also working on an international strategy and supporting our partners in Asia, which means looking toward incremental growth rather than more of the same.

In particular, the payment sector has seen a lot of change and competition over recent years. We are yet to see this play out fully but of course we are experiencing the emergence of buy-now, pay-later (BNPL) as a major new way of spending. There will be constant innovation, not just with products but also the customer experience.

A real focus is how we make things seamless from a customer perspective, not just the credit process but also in dealing with the organisation and, at the same time, meeting responsible-lending requirements. The new providers do not necessarily have to meet these requirements, but we still do.
Growing while ensuring we are meeting our regulatory obligations is one challenge we are facing, but it is also an opportunity.

MARSDEN Resimac has always had a longer-term bias toward organic growth. We are perhaps a little more opportunistic with respect to M&A opportunities. We have communicated publicly that we have a roadmap to certain growth aspirations within our core Australian and New Zealand business.

While we are cautious, we are somewhat comfortable that there are still growth opportunities in our core markets. The prime-mortgage market in Australia and New Zealand is a great example.

Meanwhile, we have capacity constraints within our origination and servicing platform – this is really one of the challenges for us, though it is a challenge the whole industry, including the banks, is currently facing.

Transitioning our business from analogue to a digital base will help here, because it will allow us to seek the opportunities scale provides. It is something we are working toward.

Frustratingly, we have been carrying excess capacity in funding and capital for a couple of years now.

But I think, over time, we will be able to balance these dynamics in the organisation and execute our growth strategy.

“I am a bit hesitant to say whether the domestic market will see a permanent shift to its level of demand being as strong as it has been recently, given the level of liquidity we are experiencing from influences such as the TFF. We can be hopeful, but I expect there will be some pullback.”


Ilic-Miloradovic ESG [environmental, social and governance] factors and related labelled issuance have been generating momentum over the last two years, but the securitisation industry as a whole is something of a laggard. This is a surprise in some ways, given the sector’s longstanding focus on data. How is the market developing globally?

GUESDE We see growing global investor demand for ESG products. Investors tell us they have raised billions of euros or US dollars to deploy toward ESG investments.

This is a trend we have seen over the last 10 years. Natixis has gone quite far on this front, including offering a greenium for assets. We subsidise lending for green assets and provide a negative adjustment for any financing that presents an environmental risk.

We could subsidise a green warehouse because of its lower risk-weighting and we are talking with the European Central Bank to see whether this could be deployed across all banks so it can become the norm.

On the investor side, we are seeing a greenium of roughly 2-3 basis points in the issuer’s favour on a transaction level for euro nonfinancial corporates, conditional on volume and pricing. The question is whether this can apply to ABS deals.

All asset classes can be green, but the market is still taking time because investors want to be sure cash flows are invested in green or ESG assets throughout their life cycle. It also takes two to three months to develop a framework with different opinions.

But it pays off in the long run. Increasingly, investors will expect ESG to be included in most transactions, or at least for them to have an ESG or green component.

Ilic-Miloradovic Pepper Money has issued green RMBS but not in recent months. Is the firm working on returning to the green format?

MOIR Definitely. A strong ESG framework is an important strategy item for Pepper Money and we look forward to returning to the RMBS market with green bonds in 2022.

Davison What are issuers’ aspirations with green mortgages? Is there a lot of appetite for this type of product among home buyers?

AUSTIN It is a really significant area and one on which we have taken a lead from Europe. Our green RMBS was around 18 months in the making. The data capture and development necessary to move to dark-green assets from light-green involves moving from the pretty soft-touch CBI [Climate Bonds Initiative] items to measuring and capturing things like thermal air flows for individual properties.

We have done this with our green-mortgage product and the take up is very good. It focuses on construction so it includes an additional overlay about creating new properties and building them to a certain standard.

The amount of demand after our green RMBS transaction is like nothing we have seen before. One question is whether we would look at bringing a public green deal. We could think about this from a pricing point of view – exploring whether or not there is a pricing benefit. But my current view is the relationship benefit from offering up green assets far outweighs benefits received on price or volume.

There are other opportunities that stem from converting a programme to have a greater ESG focus. If company officers are not positioning for the future they are really not fulfilling their obligations.

“The amount of demand after our green RMBS transaction is like nothing we have seen before. One question is whether we would look at bringing a public green deal. We could think about this from a pricing point of view – exploring whether or not there is a pricing benefit.”

Davison Is there scope for securitisation backed by social-labelled assets?

BARRY Green is important. But at La Trobe Financial we have a whole-of-business framework that addresses the complete ESG spectrum, including gender diversity in the business and carbon-neutrality targets.

On the social side, we believe the products we write have deep social impact – such as helping self-employed borrowers who have difficulty accessing credit from major lending institutions. We have been doing this for nearly 70 years.

We will be coming to market with ESG overlays on our collateral. The exercise is delayed by the verification piece and getting rating agencies on board. But it is absolutely something we have been doing for a long time and will continue to do.

ZILELI Adding to the overlay perspective, it is a bit more difficult for a consumer lender to carry out green issuance. Our focus is much more on the S and G of ESG.

We received questions about ESG in feedback from our recent New Zealand trade. These were not about issuing a green or social bond but more about sustainability commitments and policies. It is something we have taken on board and we will look to add these overlays to any deals going forward. We will build on our ESG commitments, and particularly the focus on the S and the G.

We are also thinking about any lending we can direct that would give rise to a labelled product. But it is just an idea at this stage – there is no imminent market trade. It is much more about focusing on our ESG commitment and what we can do to meet evolving investor and community expectations.

GUESDE I do not want to come across as focusing too much on green, because ESG is a common basket for investors. I agree, though, that issuers will need to have green components in everything they do in the long run.

ILIC-MILORADOVIC Presumably as issuers build the systems to measure their own impact in the community, this will naturally lend itself to being able to label and tag assets – not necessarily to optimise funding but perhaps to facilitate specific tranches or demonstrate impact.

AUSTIN I will just add we are not just recording thermal flows of our labelled green assets, we are recording the thermal flows of all assets coming through our construction programme.


Davison What will we be discussing this time next year – assuming we are, hopefully, over the worst of COVID-19?

SCANLON Property prices.

GUESDE One topic we might be talking about a year from now is exporting Australian expertise: how issuers may be seeking to grow outside Australia and issuance in foreign currencies.

RIEDEL Macroprudential regulation.

AUSTIN I was going to say foreign-currency issuance but I think macroprudentual is the correct answer.

BARRY Hopefully we will be talking about the strength of the recovery.

ZILELI Since the big impact on us recently has been borrowers reducing their debt, maybe in a year’s time we will be talking about how rapidly borrowers are increasing their debt – linked to the recovery story.

MARSDEN I think the interest-rate environment is going to be very topical going into next year.

MOIR I am going to say transition to SOFR from LIBOR, and the first deals using alternative reference rates.