By Christian Faes on Saturday 4 April 2020
The UK needs to follow Australia’s lead, and help the millions of customers that are supported by the non-bank lending sector, says LendInvest's Christian Faes.
If the country is to get through the coronavirus crisis with as little damage to the economy as is possible, it is the SMEs and the millions of people that they employ that will need to be supported. That will require the non-bank lenders to actively be able to continue to lend. Furthermore, the non-bank lending sector is going to be a critical component to helping the economy recover, when we eventually get to the other side of this crisis. We should look to Australia as an example of how this can be done.
The non-bank lending sector is a key part of the UK economy, providing finance in areas where the banks aren’t capable of assessing creditworthiness in a timely way, and to borrowers that are often SMEs, the self-employed, or have complex incomes. In the mortgage sector alone, non-bank lenders account for approximately 10 per cent of all mortgages advanced in the UK - serving the needs of millions of customers, and itself employing almost 10,000 people as a sub-sector.
To operate, non-bank lenders rely on banks and institutional investors, and the public capital markets for their funding. That is, non-banks rely on banks to provide them with warehouse funding and for the capital markets to buy their securitisations, in order to fund the loans that they then provide to their borrowers.
LendInvest completed one of the last public market RMBS transactions in the UK before the door was seemingly closed shut on the market. Our Mortimer 2020-1 securitisation had priced in the first week of March but had not yet completed. As the Coronavirus was officially declared a pandemic, and global markets nosedived to levels not seen since the great depression, the team at LendInvest were left biting their fingernails until the deal finally completed on 19 March, just as the country - and seemingly, the capital markets - were being put into lockdown by Boris Johnson.
In the current market turmoil, the capital markets are now effectively shut, and banks are not looking to provide new warehouse facilities to non-bank lenders. This is not a great situation for the majority of non-bank lenders, nor for the millions of customers that these businesses serve. Many of the UK’s non-bank lenders have stopped lending completely, which we have already seen acutely in the mortgage and SME lending space.
The UK government has undoubtedly stepped up to the plate in trying to help the country deal with this huge humanitarian and economic crisis. The Chancellor Rishi Sunak, has unveiled a number of economic support packages, including £350 bn to help SMEs and the self-employed.
To date, the government’s economic assistance programmes have been reliant almost entirely on the traditional banking sector to assist with deploying its Coronavirus Business Interruption Scheme (CBILS). The 40 accredited lenders selected by the British Business Bank are largely banks and old-world lenders. The BBB seems to have forgotten that the UK is meant to be the world leader in fintech, and that Fintech lenders might be far better equipped to deal with the overwhelming request for help from SMEs. We’re told that there will be a few non-bank Fintechs admitted to the list of accredited CBILS lenders in the coming weeks, but unfortunately, precious time has already been lost. According to the BBB, as of today (Friday 3 April) only £90m of support has actually been deployed in the first few weeks, which whilst it isn’t a wholly insignificant amount of money, it does fall far short of the headline of £350bn.
And this all brings us to Australia. Part of the Australian government’s initial economic response to the Coronavirus crisis was to establish what they have called the Structured Finance Support Fund. In announcing this Fund, the Australian Treasurer Josh Frydenberg explicitly recognised that “[S]mall lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders”. This new fund essentially allows the Australian government to actively buy into the securitisation market to support non-bank lenders and to assist with guaranteeing their warehouse funding lines.
Within just days of announcing the scheme, the Australian government was able to deploy some $189m, to support the securitisation issuance of a non-bank mortgage lender called Firstmac. Importantly, institutional investors in the capital markets took confidence from the Australian government’s participation in the transaction and allowed the lender to raise $1bn in total. The scheme, whilst only announced days earlier, has allowed the capital markets to continue to function, and for the non-bank lenders to remain open for business.
As an Australian myself, I have found myself looking back at my old home market with some envy the last couple of weeks. The government there has acted quickly and decisively to support the non-bank lending market and openly declared it an important part of the infrastructure of the economy. We now need to follow Australia’s lead.