– A $15 billion stimulus package for securitisation transactions
Timothy Lopes, Executive, Vinod Kothari Consultants
COVID-19 has pushed the global economy into recession. Many countries have made several policy reforms to address and mitigate the impact of the pandemic. Several countries have provided ‘moratorium’, ‘loan modification’ or ‘forbearance’ on scheduled loan obligations of borrowers.
There is no doubt that this deferment of payment by borrowers of principal and interest cause by moratorium in several countries, will have an impact on the cash flows in securitisation transactions.
Australia is one of the major economies that has provided relief to borrowers in the form of a six month moratorium for small business. Due to the relief provided, the country has also recognized the need for providing support to securitisation transactions which will be affected by the moratorium and has enacted a new legislation, thereby constituting a fund for structured finance.
In this write up we discuss the details of this seemingly new and innovative support mechanism for securitisation transactions.
Moratorium on loans in Australia
The Australian Banking Association (ABA) has provided a moratorium package which extends to all small business loans as well as mortgages. There will be deferment of principal as well as interest for a period of six months. Interest will continue to be accrued, it can then be paid off over the life of the loan once repayments begin again, or the length of the loan can be extended.
In order to be eligible for the same, one must have less than $10 million total debt to all credit providers and needs to be current, and not in arrears as of 1 January 2020.
The Australian Structured Finance Support Fund (SFSF)
On 24th March, 2020, Australia enacted a new law called the Structured Finance Support (Coronavirus Economic Response Package) Act 2020 (‘Act’). The Act was supported with the Structured Finance Support (Coronavirus Economic Response Package) Rules 2020 (‘Rules’) as well as the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020 (‘Delegation’).
The move was part of an announcement made by the Australian Government in this regard to provide continued access to funding markets for small and medium enterprises (SMEs) impacted by the economic effects of the Coronavirus, and to mitigate impacts on competition in consumer and business lending markets.
Pursuant to the Act, a Structured Finance Support Fund has been established with an initial corpus of A$15 billion. The said fund is managed by the Australian Office of Financial Management (AOFM).
Purpose of the Fund
The fund is set up with the purpose of making investment in RMBS, ABS and warehousing facilities to compensate for cashflows deferred as a result of COVID-19 hardship payment holidays being granted to borrowers.
The idea is to invest in securities issued by SPVs who wish to be compensated for the missed interest component of scheduled payments not received from the borrower as a result of the payment holiday granted due to the impact of COVID-19.
This will provide a source of liquidity to securitisation transactions to mitigate the impact of non-payment of interest on account of the moratorium.
Inner mechanics of the fund
Eligible lenders who can access the fund are the following –
- A non-ADI lender, (regardless of size); or
- An ADI (Authorised Deposit-taking Institution) that does not have the capacity to provide the collateral that is acceptable to the Reserve Bank of Australia (RBA) under a term funding facility (and is not a subsidiary of another ADI that does have access to such a facility).
Authorised Debt Securities –
As per the Act, the fund is permitted to invest in only in ‘authorised debt securities’. As per Section 12 of the Act, –
An authorised debt security is a debt security that:
- is issued by:
- a trustee of a trust; or
- a body corporate that is a special purpose vehicle; and
- is expressed in Australian dollars; and
- relates to one or more amounts of credit; and
- complies with the requirements or restrictions (if any) prescribed by the rules.
The Rules go on to prescribe that for the purpose of Section 12, an authorised debt security must not be a first loss security.
Thus, we are looking at investments made by the fund in the senior most securities issued by an SPV or other securities, which must not be a first loss security.
Investment priority/ decision making –
The Delegation issued, sets out the investment strategies/policies, decision-making criteria and appetite for risk and return for the SFSF. These are designed to assist the fund to prioritise between investments.
As per the Delegation, priority must be given to investments which provide support to smaller lenders.
Setting up a “Forbearance” SPV
The Australian Securitisation Forum (ASF) and AOFM are developing a structure that will enable the SFSF to invest in new senior ranking debt securities issued by a newly constituted “Forbearance” SPV.
That SPV will then advance funds to securitisation trusts and warehouses who wish to draw liquidity advances to compensate for the missed interest component of scheduled payments not received as a result of the borrower being granted a payment holiday or moratorium due to the impact of COVID-19.
The plan of the ASF is to appoint legal counsel to develop a detailed term sheet to describe how an industry wide “Forbearance” SPV can operate subject to the terms of the SFSF legislation and the operational guidelines of the SFSF. Once established eligible issuers and lenders can be registered to access the “Forbearance” SPV. It is expected that eligible participants will need to subscribe for junior notes in the “Forbearance” SPV in proportion to their participation and these notes will not cross collateralise the obligations of the other participants.
The ASF expects that the “Forbearance” SPV will appoint an independent party to verify the transfer of eligible COVID-19 receivables to the SPV and reconcile drawdowns and repayments under the liquidity facility, amongst other things.
This is an innovative structure which would identify lenders in need, particularly small lenders and provide the required liquidity by advancing funds to compensate for the impact of the moratorium.
The structured finance industry world over is seen to impacted by payment holidays provided. While in most cases, there would have to be modification in the pay-outs of the securitisation transaction, Australia has recognised the need to support securitisation structures by setting up a Fund with a seemingly large corpus to deal with the issue of moratorium.
So far, the SFSF has announced two investments to date, the first in Firstmac’s 2019-1 RMBS and the second in a Judo Bank warehouse facility. This move along with several other policy measures taken by the Reserve Bank of Australia can only help mitigate the impact of COVID-19 on securitisation structures.