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Those wishing to access the government’s new SME business fund will need to demonstrate that they are working towards achievable, demonstrable and sustainable improvements to SME lending as well as have the hallmarks of a “sound and responsible” institution.
The Australian Office of Financial Management (AOFM) have now released the finalised guiding principles for those wishing to access the Australian Business Securitisation Fund (ABSF), which provides additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms.
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The ABSF will be administered by the AOFM, which was previously involved in the residential mortgage-backed securities market in 2008.
The office announced in April that it was developing a set of principles to guide its investments under the ABSF, which are principles-based, rather than prescriptive – adding that it is “not seeking to standardise the risk or other underwriting characteristics of loans made within this market”.
These will serve as a reference for initial assessments within each investment proposal round (yet to be announced) in order to produce a shortlist for investment decisions.
It is hoped the principles will therefore help identify transactions that are “most likely to contribute to the government’s overarching objective of increasing the availability of finance to SMEs over time on more competitive terms”.
After having consulted on its draft principles in May, the AOFM has now released the final guiding principles to the market, which are grouped under two broad categories: market impact and risk management.
Under market impact, the guiding principles will require those applying to the ABSF to demonstrate:
- Sustainable impact – For example, how the proposed investment will impact the SME lender’s development path and its SME clients and how it will aim to make “achievable, demonstrable and sustainable improvements” to both the broader SME lending market and capital markets used to fund SME lending.
- Transparency – This could include whether the applicant is willing to disclose certain aspects of the transaction that could assist with the development of the market and AOFM in its need to be accountable (such as enhanced data reporting and disclosing key transaction parameters).
- Additionality/additivity – Outlining how the proposed investment will support the objective of attracting non-ABSF investment rather than “crowding it out”.
- Competition – Detailing how the proposed investment would increase competition for SME lending.
The principles also look at risk management, such as:
- Institutional quality – ascertaining whether the institute “possess the hallmarks of a sound and responsible institution”. For example, whether it is reputable.
- Lending practices – the AOFM will consider whether the applicant can demonstrate good governance and “how it models good practice in lending assessment, servicing and collections”.
- Social responsibility – understanding how the applicant manages environmental, social and governance issues.
- Transaction risk profile – outlining the quality of the underlying assets, the diversification of the pool and the structure of the transaction and what steps have been taken to address any risks.
- Compliance – demonstrating the ability and willingness to comply with the ABSF Act, ABSF Rules and ABSF Investment Mandate Directions as well as “additional, transaction-specific reporting requirements over the life of the transaction”.
At an AOFM roundtable in Sydney on Wednesday (23 July), the AOFM outlined the role the principles will play in filtering proposals and outlined how the ABSF is progressing. A similar industry roundtable is to take place at the KPMG office in Melbourne on Thursday (25 July).
However, the government office has said that when it calls for proposals, they will likely include an invitation to proponents to directly address the investment principles and a request for a description of the lender’s operating model, product range and market coverage, “including both qualitative and quantitative information regarding loans under management”.
[Related: Bill to establish $2bn SME fund approved]
