Stable Income Fund

Earning Income from non-bank lending in Australia

By 15 March 2021June 8th, 2022No Comments

A non-bank lender is a lender who is not a bank, building society or credit union, but one that has its own source of wholesale funds and lends those funds out with an added margin for profitSince non-bank lenders do not take deposits they are not regulated by APRA as the banks are but they are regulated by for example ASIC and the National Consumer Credit Protection laws. 

Private credit funds such as Wentworth Williamson Stable Income Fund seek to earn income yield for investor clients by being a source of wholesale funds to non-bank lenders. 

The Australian nonbank lending market is significant, rapidly growing and increasingly of systemic importance. A brief look at the members of the Australia Finance Industry Association (AFIA) or Fintech Australia gives some idea of the momentum in this sector. Some broad comments on market size and sectors are set out in the table below.

Sector Comment Some well-known names
Commercial real estate Non-banks are expected to fund $50bn of commercial real estate by 2024 (total bank lending in that sector is now $260bn) Think Tank, Qalitas, La Trobe
Residential mortgages Non-banks were estimated to have 5% of the residential mortgage finance market in 2019  . Since this is a $1.8 trillion market, 5% is substantial at $90 bn Resimac, Athena, Bluestone, Columbus, Pepper Money, La Trobe, AFG
Consumer loans Statistics on the provision of credit by non-banks in the form of consumer and SME loans are harder to come by, but given the explosion in the number of these providers we can safely the assume the market size is substantial and growing Latitude, Pepper Money, Wisr
SME loans Get Capital, On Deck, Moula, Prospa
Asset leasing / finance Metro Finance , Allied Credit
Specialised niches Medical professionals Credabl
Strata funders Lannock Finance
Insurance premium funding iQumulate, Attvest
Receivables financing Scottish Pacific, Octet, TIM Finance
Next generation Residential rent to own, specialised inventory financing,

Market development is being fuelled by the convergence and mutual synergy of two important trends: 

  1. For many years, as has been welldocumented, Australian banks have been either withdrawing from certain sectors or have not provided borrowers in those sectors with the service or risk appetite they require. SME borrowers and residential mortgages are two sectors where this trend has been particularly strong; and
  2. FinTech has enabled nonbank lenders to provide efficient speedy accessible transaction and lending solutions to both SME and consumer lenders  

The increasing systemic importance of the sector has been clearly acknowledged by the Australia government in two important ways. $2.3bn was advanced to the sector via the Structured Finance Support Fund administered by the AOFM to ensure wholesale funding markets for non-bank lenders remained open through the tough Covid lockdown times of 2020The SME guarantee schemes also provide significant support to the sector – the second scheme guarantees 50% of the risk on eligible loans originated by eligible lenders from 1 October 2020 to 30 June 2021.  

The nonbank lending market now comprises borrowers with size and scale in residential mortgagesSME lending and asset finance as well as numerous up and coming businesses in these sectors and others requiring more niched financing approaches. 

Nonbank lenders generally use either private warehouse or public securitization funding for the wholesale funding of their receivables. These structures typically have banks providing the senior debt, institutions and private credit funds providing the mezzanine and junior debt and the originator providing the equity. It is perhaps odd that banks fund nonbank lenders in this way but the senior debt in these structures is capital efficient for them and provides a pathway to other banking services for the bank to the nonbank lender. The mezzanine and junior debt tranches provide attractive opportunities for private credit funds and institutional investors to earn income yield for their clients. 

Our approach to add value for our clients is to identify niche non-bank lenders operating in sectors where we believe the underlying borrowers have a structural propensity to pay and the management team of the non-bank lender have an extensive track record in the business. The first partner we have selected is Credabl, a leading financier of medical professionals. We provide them financing for their loan receivables, primarily via a tranched structure where we rank ahead of their equity but behind their other funding. They have in excess of 1600 medical professional obligors all personally liable for the loans advanced and with security over the assets financed. Given the responsible nature of the medical professional obligors and the underwriting policies and procedures followed by an experienced management team the underlying portfolio has experienced zero defaults since inception in 2018. This results in the BBSW +7% we are able to earn from this funding achieving an excellent risk adjusted return for our clients.

We are also continually researching the market for other specialised and next generation niche non-bank lenders that meet our risk and return criteria. Given the growth in the market, we believe there is ample opportunity. 



IMPORTANT NOTICE: This document was prepared by Wentworth Williamson Management Pty Ltd ACN 164 774 814 (WW) in its capacity as the trustee of the Wentworth Williamson Stable Income Fund (Fund) for use only by wholesale clients as defined in sections 761G or 761GA of the Corporations Act 2001 (Cth) (Corporations Act). WW is also the investment manager of the Fund. WW is a corporate authorised representative (Australian Financial Services (AFS) Representative No. 445865) of MZL Nominees Pty Ltd (ACN 642 588 627) which holds AFS Licence No. 526845. Any express or implied advice contained in this document is limited to general advice as defined in the Corporations Act and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs of any particular person. DISCLAIMER: This document does not constitute a recommendation to purchase, redeem or sell any financial product(s). In considering the content of the document, note that past investment performance is not indicative of future investment performance and WW does not provide any assurance that the future performance of the Fund will match past investment performance. Investment income and the return of investor capital are not guaranteed. The Fund is invested into unlisted debt securities which may be illiquid and contain the risk of default by the issuer, as well as other risks, some of which are outlined in the Information Memorandum.
Before making an investment decision based on this document, the reader must consider whether it is personally appropriate in light of their financial circumstances, or should seek financial advice on its appropriateness. Financial conclusions and advice are reasonably held at the time of completion but subject to change without notice. WW assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, WW and each of its officers, employees and professional advisors disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.