In brief - Proposed Fund will enhance SMEs' access to funds and aims to prioritise investment in underdeveloped sectors

At the end of 2018 the Federal Government announced that it will establish a $2 billion Australian Business Securitisation Fund to invest in warehouse facilities and securitisations backed by small and medium enterprise (SME) loans.

What is securitisation and what are warehouse facilities?

Securitisation is a method of funding whereby the cash flows from illiquid assets (such as loans) are packaged in tranches into tradeable debt securities, with each tranche having different risk characteristics. The cash flows from the underlying loans are used to make interest and principal payments to investors. Unlike a normal bond, these securities only have recourse to the underlying assets; there is no recourse to the originator of the assets.

Warehouses are short-term finance facilities that allow a lender to write loans until they have built up a large enough pool to securitise.

Securitisation plays an important role in financial markets and, if properly managed, provides a suitable liquidity transfer mechanism. The global financial crisis is a clear example where the law and regulatory settings, and behaviour fell well below expectations and requirements for lending arrangements.

What can the fund invest in and what are the legal implications for borrowers, lenders and debt security investors?

Draft legislation and explanatory material has now been released to give effect to the fund. The consultation period for the draft legislation and material is currently open with final submissions required by 16 January 2019.

The new fund proposed by the Government is a timely initiative and is well directed toward supporting SMEs. With a proposed mandate to prioritise underdeveloped sectors, this is likely to mean a focus on lending to support innovation in the technology sector.

The law limits the types of investments that the fund can invest in to authorised debt securities. These securities must be issued by a trustee of a trust, expressed in Australian dollars, relate to one or more amounts of credit provided to one or more debtors wholly or predominantly for business purposes where each amount of credit provided is less than $10 million or any other amount prescribed, and meet other prescribed rules.

There are important legal implications under the framework, including:

Borrower

  • Borrowing terms and limits

  • Ministerial directions for strategies and policies for the fund making investments

  • Loans should not predominantly relate to businesses with a primary purpose of investing, such as superannuation funds

Lender

  • Underlying product restrictions

  • Securitisation vehicle

  • Increased competition for SME lending

Debt security investor

  • Credit and counterparty risk

  • Securitisation vehicle rights, obligations and governance

  • Underlying asset non-performance

 
















The fund will be credited in tranches over a four-year period.

When implemented, the framework will be a good way to expand the depth of the SME lending market where we anticipate that banks will retrench SME lending in the wake of the Financial Services Royal Commission. An increase in lending activity and competition (from liquidity introduced by the government scheme) in the SME lending market would provide a favourable outcome for SME businesses.

A copy of the draft legislation and explanatory material is available here - https://treasury.gov.au/consultation/c2018-t349315/

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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