When Pepper Money released its 2023 financial report in February, it included details of a funding arrangement that plays a small but growing part in Australia’s non-bank lending market – whole loan sales.
Pepper made $857.6 million of whole loan sales last year. It started its whole loan sales program in 2016 with the sale of mortgage portfolios, and last year completed its first asset finance whole loan sale.
The company’s whole loan sales and private term issuance contributed $8.7 billion of funding between 2015 and 2023.
Another non-bank lender using whole loan sales is Athena Home Loans. The company was launched in 2017 as a specialist prime mortgage lender and its first public securitisation transaction was 2022. It has also done whole loan sales to Newcastle Permanent (now part of NGM Group).
A whole loan sale involves the sale of a loan portfolio to a single funder, unlike a securitisation which involves the participation of a number of investors.
A sale may be a one-off or part of an ongoing arrangement, such as a forward flow agreement where the loan goes straight onto the balance sheet of the funder. It may or may not involve the originator continuing the generate revenue by servicing the loans.
Whole loan sales diversify funding sources for lenders and can be cheaper to arrange than securitisations.
They can allow a lender to broaden its product offering if a funder is prepared to buy a specific type of loan that would not normally be included in a securitisation deal.
They can allow a lender to restructure their business by selling non-core portfolios.
And they can allow a lender to crystallise a profit by selling the value of the loan plus a premium for the expected cash flows from repayment of the loan.
Andy Armstrong, senior portfolio manager, whole loan acquisitions, at Challenger Investment Management, said Challenger has been investing in residential mortgage whole loan portfolios since 2015, working with non-banks and ADIs.
Armstrong said: “In 2022 we increased our focus on the asset class, having observed increased demand from non-bank lenders to utilise whole loan sales to diversify funding and introduce new lending products.
“We had observed the growth of the market overseas, where investors were attracted by the scalability and illiquidity premiums on offer.”
Armstrong said deals sizes are usually in the $200 million to $500 million range and he estimated the total market size to be around $25 billion. Challenger buys portfolios and has forward flow agreements.
He said that sellers were a mix of banks and non-banks. Buyers include banks, investment managers, superannuation funds and insurance companies.
Newcastle Permanent’s purchase of a portfolio from Athena is an example of an ADI using an excess of funding to grow assets by buying loans.
Examples of sellers using whole loans sales as part of a restructure of their businesses include HSBC selling its New Zealand mortgage portfolio to Pepper and Nano selling its loans to AMP Bank.
One reason the market has grown over the past couple of years is that non-bank lenders have had to deal with high funding costs