On 19 March 2020 the Government announced the creation of a fund to facilitate an investment of up to $15 billion to enable smaller lenders to continue supporting Australian consumers and small businesses, and the RBA announced a $90 billion term funding facility for authorised deposit-taking institutions (ADIs), that is also intended to support lending to small and medium enterprises (SMEs) (among other market participants). Management of the $15 billion investment fund will be delegated to the Australian Office of Financial Management (AOFM), the Government's debt portfolio management team.
While each of these initiatives are not explicitly restricted to SMEs, the Government and the RBA have each indicated that the intention of these funding packages is to, in summary, provide support for businesses (particularly SMEs) during the anticipated economic downturn caused by the spread of the Coronavirus. In the case of the RBA, the term funding facility includes incentives allowing additional drawdowns based on the level of lending undertaken by users of the facility, with a 5x multiplier applying to SME lending activity (with only a 1x multiplier applying to other lending activity).
In the case of the Government investment fund, it is intended that the AOFM will be directed to focus investment activities on investing in securitised loans, including residential mortgages, written by smaller lenders, through either warehouses or the term market.
$15 billion Government Investment Program for Smaller Lenders
The Structured Finance Support (Coronavirus Economic Response Package) Bill 2020 was passed on 23 March 2020 and creates the Structured Finance Support (Coronavirus Economic Response) Fund (Fund) which has the aim of ensuring continued access to funding markets impacted by the economic effects of the Coronavirus, and to mitigate impacts on competition in consumer and business lending markets resulting from the Coronavirus.
Both ADIs and non-ADIs may receive investment from the Fund, however, the stated intention of the Fund is to support smaller lenders. The focus of the Fund’s activities will be investing in securitised loans, including residential mortgages, written by smaller lenders, through either warehouses or the term market. This will support the ability of smaller lenders to:
- continue to issue new loans in the current economic conditions resulting from the impact of the Coronavirus; and
- obtain funding from markets at a competitive price.
The Fund will be permitted to invest in Authorised Debt Securities. An Authorised Debt Security is a debt security that:
- is issued by a trustee of a trust, or by a body corporate that is a special purpose vehicle;
- is expressed in Australian dollars;
- relates to one or more amounts of credit; and
- complies with the requirements or restrictions (if any) prescribed in the rules relating to Authorised Debt Securities (at the time of publication, no such rules have been issued – the Minister may prescribe rules depending on how the market develops).
For example, this approach will involve investing in mezzanine tranches and warehouse facilities.
The initial capacity of the fund will be $15 billion however this may be increased from time to time.
It is intended that powers and functions of the Minister to manage the Fund will be delegated to officials of the AOFM. The AOFM is a relatively small agency with approximately 40 staff (in the 2018-19 financial year). The AOFM manages the Government’s borrowing needs and ensures that there is enough money in its bank account to meet its payment obligations at all times. Recently this role has also extended to managing Government backed fixed interest funds, such as the Australian Business Securitisation Fund (ABSF).
At the time of writing, there is no published process to apply for an investment from the Fund, however, we expect the process would largely mirror that of the application process to receive investments from the ABSF, which required market participants to submit proposals in the following format:
- A pitch book or standard investor information pack, including background material on the proponent’s organisation, its loan portfolio, and in particular the loans that are included in the transaction proposed for investment.
- A draft Term Sheet detailing the terms and structure of the transaction that is proposed for investment.
- A statement of claims against the ABSF investment principles.
- A completed copy of a survey that was issued in respect of the SME lending market.
$90 billion RBA Term Funding Facility
The RBA is establishing a $90 billion facility to offer three-year funding to authorised deposit-taking institutions (ADIs) (Facility). All ADIs that extend credit are eligible to participate in the Facility. The Facility has two objectives:
- to reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs and in turn helping to reduce interest rates for borrowers. It will complement the reduction in funding costs from the RBA's target for three-year Australian Government bond yields; and
- to encourage ADIs to support businesses during a difficult period, ADIs will have access to additional low-cost funding if they expand their lending to businesses over the period ahead.The scheme encourages lending to all businesses, although the incentives are stronger for SMEs.
The Facility has the following features:
- aggregate limit of $90 billion (aggregated across all participants);
- three year term for each drawing (early termination procedures will be available however these are yet to be published);
- fixed interest rate of 25 basis points; and
- interest due at maturity (or when the usage of the Facility is terminated).
Each ADI will be restricted to total initial drawings of the Facility equal to 3 per cent of a participant's Total Credit Outstanding to Australian resident households and (non-related) businesses, measured as the average of the participant's total credit in the three months ending 31 January 2020.
Each participant will be provided with an additional allowance calculated as follows and which is designed to incentivise SME lending:
- one times the dollar increase in Large Business Credit Outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline in Large Business Credit Outstanding, then this is zero); and
- five times the dollar increase in SME Credit Outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline in SME Credit Outstanding, then this is zero).
These additional amounts will be calculated and made available on a month to month basis during the period, as the RBA receives the relevant data. These additional amounts are included within the overall $90 billion facility limit.
Funding under the Facility will be made available to participants by way of repurchase transactions.
ADIs must have the capacity to deliver eligible collateral to the Reserve Bank in order to use the Facility. To do this, they need to be members of the Reserve Bank Information and Transfer System (RITS) and Austraclear. ADIs can apply to become RITS members to enable them to participate (for more information, see RITS Membership). Eligible collateral will consist of all collateral currently eligible for the Reserve Bank's domestic market operations. For more details, see Eligible Securities. This will include self-securitised asset-backed securities.
The RBA will apply haircuts (including through Margin Ratios) to the collateral, as set out on the Reserve Bank's website from time to time. For more details on the haircuts that apply to the Reserve Bank's existing facilities, see Margin Ratios. The Reserve Bank may apply different haircuts to collateral under the Facility. The Reserve Bank has discretion to vary its haircuts at any time.
The Facility is expected to begin taking drawdowns no later than 16 April 2020.