Australia’s booming warehouse funding market eyes $10b
Hiran Wanigasekera, IFM’s executive director of debt investments, who manages $9 billion in fixed income and private debt financing, said his warehouse portfolio includes 25 names ranging from non-bank mortgage lenders, fintechs, auto leasing companies and lately agricultural enterprises.
“In the past decade, it’s grown a lot,” said Mr Wanigasekera. “After the global financial crisis, we started getting into warehouse funding primarily because some banks, which used to be active there, just disappeared.”
Revolution Asset Management, believed to be among the top three private debt specialists after IFM and Challenger, has about $550 million invested in 16 warehouses.
Analysts estimate between $5 billion – $10 billion is currently invested in mezzanine warehouse funding in Australia.
Others include Gryphon Capital, Realm Investment House, Kapstream, Aquasia, Perpetual Asset Management, Metrics Capital Partners, Insight Investment and M+G Investments. Some of them have credit funds listed on the ASX.
Active securitisation market
A warehouse facility is a loan written by one or several lenders to a bankruptcy remote trust backed by collateral, such as mortgages or auto-loans. The trust typically raises senior ranked financing, and sometimes subordinated (or mezzanine) capital that sits beneath senior lenders. Subordinated funders charge a higher interest rate because mezzanine debt is riskier.
Put differently, warehouse funding is a form of secured lending backed by pools of individual loans rather than a single property or asset.
Warehouses are usually emptied or “termed out” from time to time in the public securitisation market. The original assets, such as mortgages, auto or equipment receivables, are transferred out of the warehouse and can be replaced by new loans to refresh the cycle.
The funding of warehouses is particularly developed in Australia, home to one of the world’s most active securitisation markets with about $125 billion of residential mortgage-backed securities (RMBS) on issue, Commonwealth Bank data show. The RMBS market funds 7 per cent of home loans in the country.
The reluctance on the part of banks has opened the door to asset managers starved for yield in a world of ultra-low interest rates.
“Generally, for warehouse mezzanine funding we are looking at a return of 500 to 600 basis points per year over the benchmark rate,” said Bob Sahota, who founded the $1.75 billion specialist debt fund Revolution 3-½ years ago.
Warehouse mezzanine funding is more lucrative compared with the returns the very same assets pay when they are eventually sold off, or “termed out” in the public asset-backed markets. Mr Sahota estimated a margin difference of 200 basis points between private and public securitisation markets. “Private warehouses are a lot more attractive to us because there aren’t many players.”
The same could be said for IFM, which realised mezzanine debt yields of as much as 12 per cent per year.
An increasing number of young companies, such as in buy now pay later (BNPL) and small lenders, are turning to private securitised debt, using the money to seed their own loan origination. Zip, Humm group, Prospa, and SocietyOne are among them.
Edgy but selective
But not all sectors and borrowers are viewed favourably.
A large portion of warehouse mezzanine lending goes to established homeloan providers such as Firstmac, Resimac, Columbus Capital, Pepper Group, Bluestone because they have a long track record.
“We are conservative,” said Mr Sahota. “We like the most established players, those who have been here for 10 to 12 years and prefer to stay clear of the newer businesses such as unsecured SME lenders which have not been through many cycles.”
The fast-growing BNPL is an area of interest with several companies including Humm group and Zip Money regularly tapping the securitisation market.
Early in September, Zip Money made its fourth foray in the public securitisation market with a $650 million issue backed by consumer loan receivables to refinance $500 million. The issue paid margins of 90 to 630 basis points over the bank bill swap rate.
Zip treasury director Akeshni Gour said 23 institutions participated in the offer, including investors in New Zealand, the UK and the US. For some, it was their first investment in Zip’s structured debt. The issue was oversubscribed.
The offer came hot on the heels of Zip’s financial 2021 results, when the payments group announced record transaction volumes of $5.8 billion, up 176 per cent year-on-year.
Ms Gour said the company plans to visit the domestic securitisation market at least once a year and would consider an offshore debut depending on its business loan growth and funding requirements. As of last June, Zip had a credit line of $2.6 billion globally, of which $1 billion was undrawn.
Tech or lender?
The biggest challenge for debt investors is defining BNPL. “Are you a lender or a tech player?” said Mr Wanigasekera, “because securitisation is about financing lenders, not tech companies.”
IFM said it is very selective when it comes to funding BNPL, having turned down several applicants because of their business models. “If a tech company does not conduct appropriate credit assessment for each of their borrowers, it could incur losses in the future,” cautioned Mr Wanigasekera.
A big benefit of private debt is the ability to negotiate terms and prices.
“We do our own credit rating evaluation, we spend time looking at the organisation’s credit process and understand what risk they take on each loan,” said Mr Sahota, whose portfolio includes exposure to consumer and personal loans, auto loans and owner-occupied mortgages.
Mr Wanigasekera said the development of warehouse funding brings increased competition for consumers and small businesses. “Having a more competitive lending market is better for the economy, compared with having an oligopoly structure.”