Request for comment on draft ABSF investment principles
23 May 2019
In an Operational Notice dated 11 April 2019, the AOFM announced that it was developing a set of principles to guide its investments under the Australian Business Securitisation Fund (ABSF).
The draft investment principles are being provided together with important context on how they will be applied in the ABSF investment assessment process.
The AOFM welcomes comments from market participants on the draft investment principles by email to firstname.lastname@example.org no later than Thursday 6 June 2019.
The AOFM is not seeking comments on the broader investment assessment process, nor is it seeking investment proposals at this stage.
The AOFM will not be calling for ABSF investment proposals until after the investment principles and arrangements for the later stages of the investment assessment process have been finalised.
Further detail will be communicated to the market as it becomes available over the coming four to six weeks.
Role of the principles in the ABSF investment assessment process
Recognising diversity within the SME lending market, the AOFM has determined that the investment guidelines for the management of the ABSF should be principles-based rather than prescriptive. Importantly, the AOFM is not seeking to standardise the risk or other underwriting characteristics of loans made within this market. Furthermore, the AOFM sees the development of market infrastructure that facilitates securitisation of SME loans as an important component that will attract additional (non-ABSF) capital to the sector over the longer term. The principles will be used for identifying transactions that are most likely to contribute to the Government’s overarching objective of increasing the availability of finance to SMEs over time on more competitive terms.
The draft principles are grouped under two broad categories: market impact and risk management. The guiding principles within each of these categories will serve as a reference for initial assessments within each investment proposal round in order to produce a shortlist for investment decisions. When the AOFM calls for proposals it will provide more detailed instructions on the form those proposals should take. This is likely to include both an invitation to proponents to directly address the investment principles and a request for a description of the lender’s operating model, product range and market coverage, including both qualitative and quantitative information regarding loans under management.
Shortlisted investment proposals will undergo a more detailed assessment process, including comprehensive due diligence and risk analysis. Some of this assessment process may be outsourced by the AOFM to an investment manager. The AOFM will provide more detail on the subsequent stages of the investment assessment process no later than when it calls for proposals.
DRAFT Guiding principles for ABSF investment
How will the proposed investment impact the SME lender’s development path, its SME clients, and make sustainable improvements to both the broader SME lending market and capital markets used to fund SME lending?
There are likely market-development benefits from publicly highlighting ‘model’ transactions. Is the proponent willing to disclose certain aspects of the transaction that could assist development of the market and AOFM in its need to be accountable, for example inter-creditor arrangements?
Additionality / additivity
Related to impact, how will the proposed investment support the objective of attracting non-ABSF investment rather than crowding it out? Transactions that include funding from other investors in non-equity tranches will be viewed more highly than those seeking 100% of their non-equity funding from the ABSF.
How would the proposed investment increase competition for SME lending generally? What would it do to the competitive landscape between the proponent and its peers?
Demonstration / convergence
Related to sustainable impact and transparency, how does the proposed transaction provide a ‘demonstration effect’ that signals the way forward from a market development perspective? Does it assist with identification of, or convergence upon, a long term solution?
Can the proponent demonstrate good governance and how it models good practice in lending assessment, servicing and collections?
How does the proponent manage ESG risks? This includes unfair contract terms, AML/CTF and reputational risk (e.g. lending to industries involved in illegal or questionable activities and the black economy).
Transaction risk profile
Noting that the ABSF expects to finance predominantly unrated transactions, can the proponent demonstrate that their proposal is broadly in line with an investment grade risk profile?
Does the proposed transaction comply with the ABSF legislation, and related rules and directions?