Key aspects of the government’s new $15-billion Structured Finance Support Fund for smaller lenders, including its first investment, have been released.
Earlier this month, the federal government said it would invest $15 billion into a new fund to enable smaller lenders to continue lending to consumers and businesses.
The federal Treasurer Josh Frydenberg announced that the Australian Office of Financial Management (AOFM) would be provided with an investment capacity of $15 billion to invest in structured finance markets used by smaller lenders that provide consumer and business finance.
The AOFM has now released additional information on the Structured Finance Support Fund (SFSF), including its first investment.
AOFM makes first investment
The first investment made by the AOFM was a purchase of $189.14 million across six tranches of the Firstmac Series 1-2020 Transaction.
In five of the six tranches, the AOFM invested alongside third party investors and was a price taker.
According to the AOFM, in one tranche (the AAA rated A2 note), it was the sole third party investor and priced significantly tighter than initial price guidance. “This was done to provide a buffer to the transaction that will benefit other investors and ultimately the sponsor, Firstmac, in light of the likely difficult credit conditions in the months ahead,” the AOFM said.
“This action has not crowded out other investors and is consistent with directions for the program,” it added.
Firstmac's RMBS issue totalled $1 billion and proceeds will reportedly be used by Firstmac to continue writing home loans.
Firstmac chief financial officer James Austin said the issue was achieved with the support of the Australian Office of Financial Management (AOFM), stating: “Firstmac has been progressing this transaction over the past six weeks. Despite the extremely difficult market conditions that have eventuated during this time, Firstmac’s longstanding investor relationships, on the back of excellent quality prime collateral and historical portfolio performance, have now allowed us to bring this transaction to market,” Mr Austin said.
“The participation of the AOFM has brought additional confidence to the investors in the transaction and has facilitated the successful pricing and upsizing of this trade.
The AOFM has acted decisively, on a timely basis, underpinning the strength and reputation of Australian RMBS, which is one of the safe haven asset classes in the world," he said.
How the SFSF is investing
The investment was made shortly after the legislation for the new fund passed Parliament and came into effect.
According to the Act that establishes the Structured Finance Support (Coronavirus Economic Response) Fund, the SFS aims to “ensure continued access” to funding markets impacted by the economic effects of the Coronavirus and “mitigate impacts, resulting from those economic effects, on competition in consumer and business lending markets”.
While the fund has been set up with a $15 billion account to invest in rated term securitisations in the primary market and in rated and unrated financing of securitisation warehouses, this fund may be extended further should the Treasurer and Finance Minister determine that it is necessary to do so.
The AOFM has said it will direct investments in primary market securitisations and warehouses financing a broad range of lending in mortgage, consumer and business lending. It has added that acceptable underlying collateral will extend beyond residential mortgages, and will include asset-backed financing and SME lending.
The SFSF particularly targets “smaller lenders”, such as non-ADI lenders (non banks), banks that are not able to access a term funding facility provided by the Reserve Bank of Australia (because they do not have the capacity to provide collateral that is acceptable to the bank for the purposes of that facility), and is not a subsidiary of another ADI, which is able to access such a term funding facility.
The AOFM is prioritising investments that:
- provide support to smaller lenders that have lost access to “reasonably priced funding” due to the economic effects of COVID‑19;
- maintain and encourage investment by the private sector in the securitisation market for smaller lenders;
- are likely to promote competition in the securitisation market for smaller lenders;
- are structured to allow smaller lenders to provide “forbearance to debtors in respect of payments under contracts for credit” and do not restrict renegotiation by smaller lenders and debtors of arrangements for making payments under contracts for credit; and
- do not adversely affect the capacity of smaller lenders to provide credit.
In making any decisions around investments, it will also consider whether there is any potential of the investment affecting other participants or prospective participants in the securitisation market for smaller lenders.
According to directions issued by federal Treasurer Josh Frydenberg, when it comes to making investments, the fund will seek to ensure that the investments “have an acceptable level of risk, including risk to the Commonwealth balance sheet (noting that credit losses may be higher in the short to medium term due to the economic effects of the Coronavirus known as COVID‑19)” and that the investment aims to achieve over the medium to long term a “positive net financial return”.
When announcing the new fund earlier this month, Treasurer Josh Frydenberg commented: “The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus.
“Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders.”
He continued: “Importantly, the assets being purchased by the AOFM will not be limited to residential mortgage-backed securities.
“The AOFM will also be able to invest in a range of other asset backed securities and warehouse facilities.”