Current Call for ABSF Investment Proposals Q&As
22 February 2021
Below is a summary of questions and answers received in relation to the current call for ABSF Investment Proposals released by the AOFM on 29 January 2021.
In developing a proposal, are you able to provide a template in Word/Excel or other editable format of your preferred layout for the “Term Sheet” or will PDF format suffice? Is there a checklist of fields or parameters that the AOFM is expecting the proponent to have covered off on?
The AOFM won’t provide a term sheet template but is indifferent to its format or the software package used to create it, provided it is in an easily read format. The Australian Securitisation Forum website has a list of its membership that includes banks and advisory firms that would be able to advise you, including providing advice on crafting a term sheet. As indicated in the session on 18 February 2021, at a minimum, the key elements of: structure (how many tranches), term, volume, key time periods, liquidity and credit enhancements should be included in the term sheet, along with details on eligibility criteria and portfolio parameters.
Is there a minimum amount that would be considered viable for a warehouse or revolving facility?
There is no minimum investment size, however relatively fixed establishment costs mean that, all else being equal, the smaller an investment, the more difficult it will be for it to be economic. Again, an advisor would be able to advise on the economics of establishing a warehouse.
What would be the appropriate amount of first loss capital that the AOFM would deem acceptable?
The ABSF cannot invest in first loss tranches, but there is no minimum level of credit enhancement to be deemed eligible (besides the zero suggested by the proscription of first loss tranches). The AOFM has disclosed that it is managing the ABSF towards an average implied rating target of BBB equivalent. The relationship between implied rating and credit enhancement is complex but in broad terms it is a function of the type of underlying collateral (secured versus unsecured) and its historic performance. For example, 10 per cent subordination might give rise to a BB implied rating for one kind of asset class, but AA for another. Increasing the subordination level to 20 per cent might cause the implied ratings to increase to BBB and AAA respectively for these examples. An advisor would be able to assist with this mapping process in a manner that is tailored to the specific kinds of loans that an originator writes and their historic performance.
The AOFM is also minded to avoid arbitrarily distorting the competitive landscape, so sees merit in maintaining a degree of uniformity around attachment points for investments with similar collateral. We have indicated that we are seeking to manage the portfolio to an average implied credit rating of BBB over time, but will start on the low risk (i.e. higher implied credit rating) side of this longer term target. There are implications in targeting an implied credit rating of BBB for the ABSF as a whole, namely that the AOFM will be seeking to spread risk over a range of ratings and this necessarily requires proportionally greater dollar allocations to tranches with implied ratings greater than BBB. For originators, this spread of implied ratings should speak to determining whether a proposal should target liquidity (i.e. senior funding), credit enhancement (mezzanine support) or some combination of both. This is the best guidance we can provide on this in the absence of seeing your proposal.
We would counsel against embedding an overly ambitious ‘wish list’ in any proposal, as it is more likely to cause a proposal to be ranked below one that is more consistent with our risk targets. This would be more likely to cause us to select the one that is more consistent with our risk targets than to seek to open a negotiation process with a proponent. The AOFM has indicated a preference for relatively complete proposals which reduce the onus on a need for subsequent negotiations.
There was talk about some small scale originators program during the virtual information session. How could we get access to the other small scale originators in order to potentially put a joint (alternate) proposal forward as a backup plan in the event our proposal does not get accepted?
The AOFM has indicated, in the context of its work under the aegis of the Structured Finance Support Fund, that it is prepared to consider multi-seller investment proposals, whereby the assets of multiple originators are pooled into a single vehicle in order to achieve greater scale. To date, the AOFM has indicated that it is exploring one such model, from a consortium led by NeuCapital. Industry bodies such as AFIA and Fintech Australia may be able to link a proponent with like-minded potential participants in a multi-seller vehicle.