Summary of Q&A sessions | Sydney & Melbourne
5 August 2019
On 23 and 25 July, the AOFM held ABSF information sessions in Sydney and Melbourne. Below is a summary of the question and answer sessions that followed the ABSF information session Speech.
Is the fund going to invest in notes, and if so, is there an indication of the pricing range?
The ABSF will invest in notes in the form of either warehouse facilities or term deals. The expectation is that the ABSF may predominantly invest in notes issued by warehouses initially, and migrate to term deals over time. For example, if the ABSF finances a warehouse for a number of years, it would be well placed to underwrite the terming out of that transaction in future years.
The approach to pricing will be to gauge the market rate, and if applicable, apply a subsidy to achieve the aims outlined in the Investment Mandate Directions. The subsidy may go towards achieving a broader market development that encourages private sector investment, such as the publication of data that assists in developing a track record. Consistent with the Directions, any subsidy must be considered to be reasonably required to achieve those aims, and will need to have regard to the Government’s ability to exit the market in the long-term without causing significant dysfunction.
Is there a minimum tranche size?
The AOFM has not specified a minimum tranche size to date, but it may do so in future. As outlined in the speech, the AOFM is aware of the need for individual investments to be of meaningful size, but not so as to unduly disrupt the competitive landscape.
Will the AOFM give credit to insurance or ratings if applicable?
Yes, insurance and ratings will be considered when forming a view on pricing in the sense that it will influence the AOFM’s deliberations on what constitutes a market rate.
Are smaller scale lenders (which you mentioned with respect to multi-seller transactions) able to meet the Institutional Quality Guiding Principle?
Yes. The intent of the Institutional Quality Principle is to allow the AOFM and its external investment manager to comprehensively review the organisation and its lending practices. Lenders do not have to be of a certain size to connote quality. Multi-seller transactions are a potential way of achieving the scale required for a transaction, managing concentration risk, and/or accelerating the generation of a more representative track record for the market which will help to attract new investment.
Will the AOFM communicate its decision process to the market after the first round of investments?
In principle the AOFM supports this idea, but needs to be mindful not to reveal information that would commercially disadvantage individual lenders. The market will be able to infer some information from the investments that are made, but to the extent that it aids the market, the AOFM will consider highlighting particular aspects of the decision process.
Is there a minimum number of years of track record required of lenders?
No. The AOFM sees the absence of a track record as a symptom of the funding access issue that the ABSF was created to address. The AOFM expects that its external investment manager will be able to provide guidance on the information that can be used to form an assessment of institutional quality in the absence of a track record.
When investing in warehouse facilities, is the intention for AOFM to deploy the entire allocation of funding upfront, or allow for the capacity to ramp up over time?
The AOFM will allow for the capacity to ramp up its investment in warehouse facilities over time. Noting that only loans originated after 11 April 2019 are eligible for the underlying pools of ABSF investments, the expectation is that facilities will initially be undrawn (or close to it) and will build up over time. One implication of this is that the AOFM intends to be constructive on undrawn fees, to allow for this constraint. Over time, the AOFM would seek to migrate to a market standard for undrawn fees having regard to the Government’s ability to exit the market in the long-term without causing significant dysfunction.
If the funds available to the ABSF on 1 July are not deployed in full, will they roll over to new investments? Are future investment rounds likely to occur shortly after the funds become available on 1 July each year?
Yes. Funds will remain available if not invested in the same financial year as they are made available. The timing of the 2019-20 investment round was described in the ABSF information session Speech. In future years, the processes required for the initial setup of a framework for the ABSF administration will no longer be a factor determining timing.
Are there any jurisdictions offshore that you looked to for inspiration on multi-seller arrangements?
No, the AOFM is not aware of any such examples. The AOFM came across the concept during its implementation of the RMBS program. Despite its appeal, it did not eventuate in that context. It has particular appeal to manage some of the risks and concentration issues in the SME lending securitisation market, as discussed earlier.
What about the ABSF’s impact on existing investors?
The AOFM has consulted a wide range of investors to develop an understanding of the market and appreciate their concerns, in particular about being crowded out. A core aim of the ABSF is to attract new investment in the long term, primarily through developing a track record, which will take some time. In the meantime, the AOFM will be conscious of, and closely monitor, the ABSF’s impact on existing investors for any deterioration in investment activity as a consequence of the ABSF’s activities.
How prescriptive will the AOFM be in determining data standards? Will there be a form of consultation, or will the investment proposals themselves be the vehicle for identifying the data standards?
There are two forms of data that have been discussed in relation to the ABSF. The first relates to an exercise in the AOFM collecting information to map out the market to assist with the identification of the fund’s entry point and to provide some top line indicators of the market’s development in time. The second relates to a longer-term initiative to develop a data warehouse of SME loan performance data for the purpose of establishing a track record for the sector. The AOFM’s intention is to influence the market to converge on a format for that data warehouse rather than dictating it, and to this end it is in the process of recruiting a staff member to progress the initiative. Investors, rating agencies and originators will all have an opinion on the format so it will take time to establish. The intention will be to backfill the data warehouse once it is established.
Can you define the term ‘acceptable but not excessive level of risk’ used in the Investment Mandate Directions?
The AOFM has interpreted the Government’s statements on this as having an overall investment grade risk appetite for the ABSF as a whole, if all transactions were to have a formal credit rating. Based on this working assumption, the AOFM can anchor, for example, the probability of default and expected losses within the ABSF.
At what point in time will the efficacy of the ABSF be reviewed, particularly in light of recent reports from the Productivity Commission highlighting the need for such reviews?
As per Section 21 of the ABSF Act, the Treasury will review the effectiveness of the ABSF in meeting its objectives on the second and fifth anniversaries of the commencement of the Act (6 April 2019).
Will the AOFM consider responsible lending practices?
Yes. This is captured in the Social Responsibility Guiding Principle. The AOFM will not outline prescriptive standards, but rather will expect proponents to make a representation as to how they manage responsible lending with regard to the relevant rules and regulations.
How will you measure the progress of lenders in terms of equipping their systems for enhanced data reporting, and how will the AOFM deal with underperformance in this regard?
The AOFM will closely monitor and work with lenders who commit to equipping their systems for enhanced data reporting. The AOFM has not determined any specific sanctions as such, but will work with its investment manager and legal advisors as well as the relevant lenders in order to agree a way to hold the lender to account for its commitments in this regard.
Will the ABSF be investing in senior tranches or elsewhere in the transaction structure, and does it have a return target?
Both senior and mezzanine tranches are in scope, but first loss pieces are not. Under the Investment Mandate Directions, the medium-term net return on ABSF investments is benchmarked to the Bloomberg AusBond Treasury 0-1 year index. That allows a degree of flexibility in terms of imparting subsidy to achieve market development goals.
Are smaller lenders able to collaborate and find scale via multi-seller arrangements?
Yes. The AOFM is ‘technology neutral’ with respect to transaction structure and wants to encourage innovation. Multi-seller arrangements are a good example of a mechanism that would seem to be aligned with the market development goals of the ABSF, and reducing potential issues including distorting the competitive landscape of the market by achieving economies of scale while diffusing the halo effect that comes with Government support.
Does the AOFM have an idea of landscape of the SME lending market?
The AOFM has a broad understanding of the landscape, as described in the ABSF information session Speech. It hopes to gain a better understanding through the empirical data gathered as part of the investment proposal process, also described in the Speech.
Is the AOFM likely to support established lenders, or look to stimulate growth in new lenders?
Investment decisions will be a function of the investment strategy as described in the ABSF information session Speech and an assessment of the proponent’s claims against the Guiding Principles, rather than strictly a function of years in operation.
Do you think the major banks can contribute data to the establishment of a track record, and is there any way you can incentivise them to do so?
In theory they can, as they have useful data in this respect, but there is no obvious way to use the fund to incentivise them to do so, given loans they originate are out of scope.
Are there lessons to be learned from the ABSF by other government bodies (for example, ABS, ASIC, ATO) with respect to the data they collect around businesses, markets and lending that could be enhanced to better inform future policy initiatives?
In theory, yes, and the AOFM would cooperate in any way it could for such an initiative.
Has the AOFM considered forms of credit enhancement such as insurance or guarantees from third party providers?
Such forms of credit enhancement could be considered, subject to cost effectiveness, but the AOFM has not explored these to date. The risk-reducing benefits to the taxpayer would need to be weighed against the cost of the insurance incurred by the originator.