Hiran Wanigasekera, executive director of debt investments at IFM, which manages $ 9 billion in fixed income financing and private debt, said its warehouse portfolio includes 25 names ranging from non-bank mortgage lenders, fintechs, auto leasing companies and, more recently, agricultural businesses.
“Over the past decade it has grown a lot,” Wanigasekera said. “After the global financial crisis, we started to get into warehouse financing mainly because some of the banks that were once active there just disappeared.”
Revolution Asset Management, which is said to be among the top three private debt specialists after IFM and Challenger, has invested around $ 550 million in 16 warehouses.
Analysts estimate that between $ 5 billion and $ 10 billion is currently invested in financing mezzanine warehouses 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 ASX.
Active securitization market
A warehouse facility is a loan from one or more lenders to a bankruptcy remote trust backed by collateral, such as mortgages or auto loans. The trust usually raises senior finance and sometimes subordinate (or mezzanine) capital that is under the senior lenders. Subordinate financiers charge a higher interest rate because mezzanine debt is riskier.
In other words, warehouse finance is a form of secured loan backed by pools of individual loans rather than a single property or asset.
Warehouses are typically emptied or “canceled” from time to time in the public securitization market. Original assets, such as mortgages, auto or equipment receivables, move out of the warehouse and can be replaced with new loans to refresh the cycle.
Warehouse financing is particularly strong in Australia, which is home to one of the most active securitization markets in the world with around $ 125 billion of residential mortgage-backed securities (RMBS) issued, according to Commonwealth data. Bank. The RMBS market finances 7 percent of the country’s mortgage loans.
Bank reluctance has opened the door to yield-hungry asset managers in a world of ultra-low interest rates.
“In general, for warehouse mezzanine financing, we are looking for a return of 500 to 600 basis points per year against the benchmark rate,” said Bob Sahota, who founded the specialized debt fund of 1.75 billion. of Revolution dollars 3 and a half years ago.
Mezzanine warehouse financing is more lucrative in relation to the returns that the same assets pay when they are ultimately sold or “terminated” in asset-backed public markets. Mr Sahota estimated a margin difference of 200 basis points between private and public securitization markets. “Private warehouses are much more attractive to us because there are not many players.
The same goes for IFM, which has achieved mezzanine debt yields of up to 12% per annum.
A growing number of start-ups, such as In Buy Now Pay Later (BNPL) and smaller lenders, are turning to private securitized debt, using the money to start their own loan origination. Zip, Humm group, Prospa and SocietyOne are among them.
Bold but selective
But not all sectors and borrowers are viewed favorably.
Much of warehouse mezzanine loans go to established home loan providers such as Firstmac, Resimac, Columbus Capital, Pepper Group, Bluestone because they have a long history.
“We are conservative,” Sahota said. “We like the more established players, those who have been here 10 to 12 years and prefer to stay away from new businesses such as unsecured SME lenders that haven’t gone through many cycles.”
The rapidly growing BNPL is an area of interest with several companies including the Humm Group and Zip Money regularly tapping the securitization market.
In early September, Zip Money made its fourth foray into the public securitization market with a $ 650 million debt-backed consumer loan issue to refinance $ 500 million. The issue reported margins of 90 to 630 basis points on the banknote swap rate.
Zip’s treasury director Akeshni Gour said 23 institutions participated in the offer, including investors in New Zealand, the UK and the US. For some, this was their first investment in Zip structured debt. The show was oversubscribed.
The offer came just after Zip’s financial results in 2021, when the payments group announced record transaction volumes of $ 5.8 billion, up 176% year-over-year.
Ms Gour said the company plans to visit the domestic securitization market at least once a year and would consider debuting overseas depending on its business lending growth and financing needs. Last June, Zip had a $ 2.6 billion line of credit worldwide, of which $ 1 billion was unused.
Tech or lender?
The biggest challenge for debt investors is to define BNPL. “Are you a lender or a technology player? Wanigasekera said, “because securitization is about funding lenders, not tech companies.”
The IFM said it was very selective when it came to financing BNPL, having turned down several candidates because of their business models. “If a tech company does not conduct an appropriate credit assessment for each of its borrowers, it could incur losses in the future,” Wanigasekera warned.
A big advantage of private debt is the ability to negotiate terms and prices.
“We do our own credit score assessment, we spend time reviewing the organization’s credit process and understand the risk it takes on each loan,” said Mr. Sahota, whose portfolio includes a exposure to consumer and personal loans, auto loans and owner-occupied mortgages. .
Mr. Wanigasekera said that the development of warehouse finance leads to increased competition for consumers and small businesses. “Having a more competitive credit market is better for the economy, compared to an oligopoly structure. “