New measures introduced to support small lenders
On 19 March 2020, the Australian Government announced relief measures for smaller lenders who finance their loan origination through securitisation, to ensure their continued access to funding markets. The support will be via a mandate for the Australian Office of Financial Management (AOFM) to invest directly in asset-backed securities issued by smaller lenders subject to various investment guidelines. The support is currently limited to primary market issuance.
The measures involve the establishment of an initial $15 billion Structured Finance Support Fund (SFSF) under the Structured Finance Support (Coronavirus Economic Response Package) Act 2020 (SFA), which came into force on 25 March 2020. The SFSF will be administered by the AOFM under powers delegated to it under the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) 2020 (SF Delegation) which is an ancillary instrument to the SFSA.
The investment guidelines that will inform the AOFM’s investment activities are set out in the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020 (SF Direction), which is a further ancillary instrument to the SFSA. The SF Direction sets out investment strategies and policies and investment decision-making criteria which must be followed by the AOFM as the Minister’s delegate, including a requirement that the AOFM prioritises the following when making investments:
- investments that provide support to smaller lenders that have lost access to reasonably priced funding due to the economic effects of the Coronavirus known as COVID‑19;
- investments that maintain and encourage investment by the private sector in the securitisation market for smaller lenders;
- investments that are likely to promote competition in the securitisation market for smaller lenders;
- investments that are structured so as:
- not to restrict renegotiation by smaller lenders and debtors of arrangements for making payments under contracts for credit; and
- to allow smaller lenders to provide forbearance to debtors in respect of payments under contracts for credit; and
- investments that do not adversely affect the capacity of smaller lenders to provide credit.
Relationship with other measures
The SFSF complements a range of other initiatives introduced by the Australian Government at the same time to support the economy (as summarised in the related explanatory memorandum). Those other initiatives include a term funding facility (TFF), which was also announced on 19 March 2020. The TFF is a 3-year facility that will be provided by the Reserve Bank of Australia (RBA) to all authorised deposit-taking institutions (ADIs) within the meaning of the Banking Act 1959 (Banking Act) that extend credit, with the aim of reducing their funding costs. The RBA is encouraging all participating ADIs to pass on their interest savings on the facility and expand their lending to all businesses, with stronger incentives for small and medium-sized enterprises.
ADIs can only access the facility if they are able to deliver eligible collateral to the RBA. Although larger ADIs will be able to satisfy this requirement, many smaller ADIs do not currently have this capacity. The SFSF is therefore an additional measure for ADIs who access finance through securitisation markets, and are not eligible to participate in the TFF as a result of the collateral requirements (see further commentary on this below).
Who are “smaller lenders”?
The SFSF is only available to “smaller lenders”. This is defined in the SF Direction to capture all non-ADI lenders within the meaning of the Banking Act, and any ADIs who are not able to access a term funding facility (including the TFF) provided by the RBA because it does not have capacity to provide collateral that is eligible for the purpose of that facility (and is not a subsidiary of another ADI where the other ADI is able to access such other term funding facility).
What are the SFSF’s general characteristics?
- Size: A$15 billion (can be increased)
- Period: 12 months (can be extended)
- Permitted investments: all authorised debt securities that meet the requirements of subsection 12(4) of the SFSA (see further details below)
- Assets: The AOFM’s investments will not be limited to residential mortgage backed securities. The AOFM will also be able to purchase authorised debt securities that support a range of small business and consumer lending activities including credit cards, automobiles and personal loans.
What types of investments will be captured?
A debt security will be an “authorised debt security” for the purpose of subsection 12(4) of the SFSA if it:
- is issued by a trustee or a special purpose vehicle;
- is expressed in Australian dollars;
- relates to one or more amounts of credit; and
- complies with the requirements or restrictions (if any) in relation to authorised debt securities, as prescribed by the Structured Finance Support (Coronavirus Economic Response Package) Rules 2020 (SF Rules). So far, the only restriction under the SF Rules is a requirement that the debt security must not be a first loss security. This leaves it open for the AOFM to invest in rated or unrated notes (including mezzanine notes) issued under both term and warehouse securitisations.
More Information regarding eligible and ineligible can be found on the SFSF page of the AOFM website.
Have there been any investments to date?
The AOFM’s first investment under the SFSA was a purchase of A$189.14 million authorised debt securities on 27 March 2020 across six tranches of the Firstmac Series 1-2020 Transaction. In five of the six tranches, the AOFM invested alongside other third-party investors and was a price taker. In relation to one tranche, the AAA rated A2 note, the AOFM was the sole third-party investor.
Will other measures be introduced to support of the securitisation industry?
The AOFM has stated that it is currently working with the Australian Securitisation Forum and industry more broadly to accommodate the matter of mortgage holidays and its impact on securitisation vehicles. This follows a recent announcement by the Australian Prudential Regulation Authority that where borrowers are accessing payment holidays on their mortgages as a result of COVID-19, banks need not treat the period of the repayment holiday as a period of arrears.
We expect there will be further announcements relating to this issue in the coming weeks to mitigate the impacts of mortgage and other consumer stress on securitisation structures. Although RMBS structures are protected to some extent by historically high prepayment rates, these prepayment rates are expected to fall, which will reduce the principal available for issuers to draw on to maintain interest payments under these structures. More generally, issuers across all asset classes usually have access to liquidity facilities or reserves designed to fund interest shortfalls, including payment arrears on the underlying asset classes. However, accessing these facilities will come at a cost, creating drag on the excess spread available for distribution under these structures. In addition, although liquidity buffers are designed to cover senior expenses and note interest for a reasonable period during a downturn, the impact of the sharply rising unemployment rate in these unprecedented circumstances will test these buffers in ways that historic rating agency scenario testing may not have contemplated.