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Fintechs eye $15b fighting fund as Judo bags cheque

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Non-bank lenders Prospa, Zip and Flexigroup are among a group of fintechs considering applying for government support under a $15 billion structured finance fund, which has been set up to ensure appropriately priced credit flows into competitors of the major banks.

The Australian Office of Financial Management said on Thursday afternoon it would provide $250 million from the new fund to Judo Bank, part of a total $500 million investment by AOFM into a Judo warehouse to support its lending to small businesses.

AOFM is expected to be hit with a flurry of other funding requests, including from fintechs uncertain about whether covenants with their own funders might be breached if they provide struggling customers with loan deferrals.

The Australian Financial Review understands banks and other funders are in negotiations with several non-bank lenders about whether COVID-19 loan deferral would be considered as a loan 'in arrears'.

The Australian Prudential Regulation Authority has provided authorised deposit-taking institutions with leniency on the issue, saying on March 23 that banks don't need to treat repayment holidays as a period of arrears, and that loans deferred under a COVID-19 support package need not be regarded as being restructured.

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But dealing bilaterally with their lenders, most fintechs don't have the same level of certainty.

Treasurer Josh Frydenberg announced the AOFM program on March 19, providing an investment capacity of $15 billion to purchase residential mortgaged back securities – or other asset-backed securities – from small and non-bank lenders over a 12-month period.

Treasurer Josh Frydenberg's AOFM announcement has piqued the interest of under-the-pump fintechs. Alex Ellinghausen

It has provided $189 million to fund a Firstmac RMBS deal on March 23, and on Thursday said Judo would also receive funding for an asset-based securitisation of SME loans. Judo co-CEO David Hornery said this "will have a direct and positive impact on small and medium-sized enterprises nationally".

AOFM has a further $14.5 billion to deploy under the emergency program, under which it will consider applicants' ability to access reasonably priced credit and maintaining competition in the market.

The AOFM will consider investing in a non-bank lender's first securitisation, and will also consider supporting deals with existing warehouse providers.

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Lining up

Sources said ASX-listed consumer and small business firm Flexigroup would make its own submission to tap funding under the facility. The group has aggressively expanded its buy now, pay later business in the past 12 months, but has long provided credit to SME customers in the form of asset leasing and finance.

Online small business lender Prospa is understood to be another applicant.

The group, which listed on the ASX last year, provides short-term unsecured loans to small firms. Earlier this week, ratings agency Moody's put some of Prospa's notes on negative credit watch, citing concerns the pandemic shutdown could lead to rising defaults among Prospa's customers.

Both Flexigroup and Prospa are expected to argue as part of their submissions that it is important for the government to support non-bank lenders through the crisis, to ensure competition remains robust during the pandemic, and into the recovery phase, when SMEs will need greater support.

Zip Co is understood to have already made an application to the AOFM, while Afterpay is supporting efforts being taken by the Australian Finance Industry Association (AFIA) on behalf of the wider industry.

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The AFIA, which represents more than 100 non-bank lenders, is working closely with the government, Treasury and the AOFM on the design and implementation of the initiatives and has been pushing for the AOFM to allocate funding to a variety of smaller players.

“Smaller lenders are looking at how the fund can help them be able to access additional capital so they can match the banks and offer their customers a six-month repayment holiday, which will be really important to make sure more businesses and households get the longer-term assistance they need to get through the crisis," said AFIA CEO Diane Tate.

"Smaller lenders are working with their financiers, including banks and other institutional investors, and making preparations so they can participate in the fund as soon as possible," Ms Tate said.

"Other smaller lenders that haven’t had experience with structured finance are also being encouraged to participate, and get advice about how they can adjust their funding model so they can access the fund."

Established players in box seat

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However, some are concerned the AOFM will be selective with fintechs that don't have much of a track record.

"I think it's probably too big an ask for AOFM to fund individual non-banks at an earlier stage," says Neil Slonim, an advocate for SMEs who writes The Bank Doctor newsletter.

"I reckon the better bet would be to open up the $130 billion [RBA term funding facility] TFF to non-banks, or alternatively encourage the banks who already provide wholesale funding to fintechs to use the TFF to inject more funds into their fintech clients to allow them to lend."

National Australia Bank has pledged $2 billion to fund fintechs, including via warehouse structures.

Some professional investors are sceptical whether some fintechs can survive. Kate Howitt, a fund manager at Fidelity International, said on Monday the COVID-19 pandemic will force a reassessment of what consumers consider to be necessary items.

"There are those business models that seem to rely on an endless supply of easy credit," she said. "Those business models don't have an automatic right to continue to exist.

"A lot of the new tech business models are not profitable on an ongoing basis. I don't see that there's going to be much validity to support those sorts of businesses."

"I have been saying for a while, that in an up market we call it fintech and in a down market, it's shadow finance."

AOFM says non-bank lenders should be consulting with warehouse providers and were then welcome to make an expression of interest, and AOFM could discuss the extension of an existing warehouse with other existing financiers of the same warehouse once it has received an expression of interest from a smaller lender.

James Eyers writes on banking, payments and fintech. He is a former legal and investment banking editor at the AFR, has degrees in commerce and law from UNSW, and is co-author of Buy now, pay later: The extraordinary story of Afterpay Connect with James on Twitter. Email James at jeyers@afr.com.au
James Thomson is senior Chanticleer columnist based in Melbourne. He was the Companies editor and editor of BRW Magazine. Connect with James on Twitter. Email James at j.thomson@afr.com
Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking. He is based in Sydney. Connect with Jonathan on Twitter. Email Jonathan at jonathan.shapiro@afr.com

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