Which port in this storm? The Australian Federal Coronavirus Economic Response Package and non-ADI financiers

The Federal Government has introduced several measures to address the negative impact of the COVID-19 pandemic on the Australian economy.

This note outlines four measures that are directly relevant to many non-ADI financiers. Three of these measures concern access to funding and financial support. We will then consider two of those three funding measures in more detail.

Each non-ADI financier needs to assess:

• which funding and financial support measures are best suited to its business; and
• the optimal way to access funding under those measures, and their interaction with existing funding and securitisation arrangements.

Summary

Guarantee of Lending to Small and Medium Enterprises

The Government is to provide a guarantee in favour of eligible lenders to the extent of 50% of certain loans made by those eligible lenders.

Those loans are:

• made to SMEs, including sole traders, with a turnover of up to $50 million;
• in an amount of no more than $250,000 per borrower;
• made with a term of up to three years, with an initial 6 months’ repayment holiday; and
• unsecured.

Overall, $40 billion will be appropriated for the purpose of making these guarantees.

Eligible lenders include ADIs (banks) as well as non-bank financiers.

Broadly, non-bank financiers are corporations carrying on business in Australia that have debts due to them (arising from the provision of finance) that exceed $50 million, including in the most recently ended financial year.

It is expected that more information will be available in the coming days.

If you are a non-bank financier, you may wish to consider a loan product that satisfies the above criteria. This product may help customers through this tough economic period – including by enabling customers to service wages, existing loans and other existing indebtedness. It would also provide the benefit of the 50% Government guarantee and, potentially, sit outside of existing funding and securitisation arrangements.

Responsible lending obligations do not currently apply to lending that is predominantly for a business purpose. Nonetheless, to help SMEs secure access to credit quickly and efficiently, the Government has foreshadowed an exemption from responsible lending obligations for lenders providing credit to existing small business customers. This exemption is to be for six months, and will apply to any credit for business purposes, including new credit, credit limit increases and credit variations and restructures.

ADIs (banks) and non-ADI financiers should act quickly to engage with the Treasury, should they wish to consider offering a loan product to the market utilising these initiatives.

Structured Finance Support Fund

The Structured Finance Support (Coronavirus Economic Response Package) Act 2020 (Cth) establishes the Structured Finance Support Fund (SFSF). The SFSF will initially be credited with $15 billion, and the Government may subsequently credit additional amounts to the SFSF.

The SFSF is to enable the Government to support access to funding markets for SMEs affected by the COVID-19 pandemic. It is also intended to mitigate adverse effects on competition in consumer and business lending markets.

The SFSF will be administered by the AOFM. The AOFM will make targeted investments in the structured finance markets utilised by smaller lenders that provide consumer and business finance, investing in rated term securitisations (eg RMBS) and rated and unrated securitisation warehouses.

If you are a non-bank financier, you may wish to approach the AOFM directly or via your securitisation or warehouse arranger or provider. If you approach the AOFM directly, you should ensure that your proposal is realistic and reasonable.

Our team is helping several non-bank financiers to assess the options open to them to access SFSF funding. Please let us know if we can assist you.

The Treasurer’s direction to the AOFM mandates the following priorities, decision-making process and investment risk and return criteria in investing the SFSF.

Investment priorities

The AOFM has been directed by the Government to prioritise the following:

• investments that provide support to ‘smaller lenders’ that have lost access to reasonably priced funding due to the economic effects of the COVID-19 pandemic. A ‘smaller lender’ is either:
  o a bank which does not have access itself or via its parent to a term funding facility provided by the Reserve Bank; or
  o a financier which has lent or otherwise financed indebtedness exceeding $50 million, including in the most recently ended financial year;
• 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:
  o not to restrict renegotiation by smaller lenders and debtors of arrangements for making payments under contracts for credit; and
  o 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.

Investment decision-making process

In making an investment, the AOFM must consider:

• whether the investment will be consistent with the priorities outlined above;
• the potential of the investment to affect other participants or prospective participants in the securitisation market for smaller lenders, having regard to the policies outlined above;
• if the investment would be made at a rate of return that is less than the market rate, whether the investment is reasonably required, having regard to the policies outlined above and the decision-making process specified here;
• whether the investment would be appropriate, having regard to the investment risk and return considerations specified below; and
• whether the investment is consistent with the Act.

Investment risk and return

In making investments, the AOFM must:

• ensure that investments have an acceptable level of risk, including risk to the Commonwealth balance sheet, noting that credit losses may be higher in the short to medium term, owing to the COVID-19 pandemic; and
• aim to achieve a positive net financial return over the medium to longer term.

Comment

Non-bank financiers need to move quickly yet strategically, should they wish to access either or both of the:

• Guarantee of Lending to Small and Medium Enterprises
• Structured Finance Support Fund (SFSF).

New products may need to be developed and existing products may need to be changed, both without adversely impacting on existing warehouse and securitisation programs. We can assist.

Queries

If you have any questions about this article, please contact the authors, or any member of our Banking & Finance team.

Disclaimer

This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only.  It does not constitute legal or financial advice.  If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.