Treasury has rejected criticism of the Australian Business Securitisation Fund that it is “crowding out” other investors and funding at subsidised rates, saying the fund has appropriate processes in place to minimise these risks.
Treasury has released a review of the ABSF, reporting that the industry consensus is that it “is making progress towards meeting its objectives” and that there is broad support for it to continue.
It recommended that the Australian Office of Financial Management, which administers the ABSF, continue to implement the fund with an emphasis on under-served parts of the SME funding market and a goal of facilitating term securitisation market access for SME lenders.
The crowding out issue raised in some submissions has emerged as investor demand for securitisation warehouses backed by SME collateral grows in response to the high risk-adjusted returns on offer from the asset.
Treasury said: “A key part of the ABSF investment mandate is the consideration of whether the investment is encouraging private sector investment. Given the relatively small volume of ABSF funds that have been invested to date, and the relatively small volume of the ABSF in the context of the broader market, the possibility of ABSF investments having a material crowding out effect are likely to be limited at this time.”
One SME lender that received ABSF funding, Judo Bank, said in its submission that the ABSF’s investment had a “crowding in” effect, “provided meaningful support in inboarding a global banking partner to provide warehouse funding”.
The ABSF was established to improve lending market conditions for SMEs by facilitating the development of the securitisation market for SME lenders. The government committed A$2 billion to the ABSF over four years to invest in securities issued by warehouses and special purpose vehicles established by small business lenders.
So far it has made four investments: $250 million in a Judo Bank warehouse in 2020; an $87.5 million mezzanine investment in a GetCapital (now Shift) warehouse last September; a $30 million investment in an OnDeck Australia warehouse last September; and a $65 million investment in a Prospa warehouse this month.
The fund administrator, the AOFM, is required to prioritise investment in underdeveloped sectors of the SME securitisation market, assist the development of the market, encourage investment in SME securitisation by the private sector and promote competition in the SME lending sector.
To date there has been one public securitisation transaction backed by SME loans in the Australian market. The deal was executed by Prospa in September last year.
Treasury said industry participants were particularly supportive of the ABSF’s work to standardise SME loan data reporting.
It said the comparability, consistency and availability of residential mortgage data is one reason for the strength of the Australian residential mortgage-backed securities market.
There was no equivalent reporting standard for SME loans until last year, when the AOFM and the Australian Securitisation Forum published the first version of a reporting template.
Treasury said it was not able to assess whether the ABSF had had any impact on lending rates for SMEs.
It said the settings and investment mandate of the ABSF Act,