As superannuation funds grow, they become more important non-bank lenders to corporate Australia, offering diversity outside the big four banks, a discussion on banking regulations has heard.
Cbus Super fixed interest and cash senior portfolio manager, Michael Swan, said tighter regulatory lending constraints on banks since the global financial crisis have created good opportunities for institutional investors in direct lending and other credit markets.
“As a result of significant regulatory pressure, the banks have had to materially de-lever their risk and simplify their business models,” Swan said. “There are opportunities for us in the direct lending space; we hope to fill a few gaps.”
Swan spoke on a panel titled “How regulation affects institutional asset owners” at the Investment Magazine Fixed Interest and Credit Forum in Victoria. He said stronger capital adequacy ratio demands on banks had prompted super funds’ increased activity in treasury functions and lending.
“As super funds get bigger, they’ll be another important non-bank lender and provider of capital,” he said. “It’s good from an Australian corporate perspective – greater diversity and lending outside the big four for longer tenures.
“Whilst we’re are active in the space, we haven’t done a lot yet. Margins are tight…there’s still a mismatch going on and a willingness to pay what we consider fair compensation for the longer tenure. We think there’ll be more opportunities in this space.”
First State Super head of treasury, Michael Clavin, broadened the fund’s security finance operations when he realised banks would face balance-sheet constraints.
“As liquidity coverage ratios (LCRs) started taking effect overseas, we started working on finance deals with US and European banks and slowly the Australian regulators also put the effects of LCR and net stable funding ratios (NSRs) onto the deposit-taking institutions in Australia,” Clavin explained. “That really allowed us to have an open dialogue with (bank) treasury departments, bypassing the sales desk and discussion with what First State Super, as a large capital provider, could provide the banks in their short-term funding needs.”
A six-strong treasury team was mindful of the fund’s liquidity profile and member expectations and had a strong underwriting policy, he said.
Challenger head of acquisition David Hoskins said Australia’s non-bank lenders were slowly following European and US markets in taking a larger slice of the debt market.
“Look at the European direct-lending market. Banks, once 70 per cent of the market, are now is 40 per cent,” Hoskins said. “In Australia, banks hold 80 per cent in [lending to small and medium-sized entities]. Regulations will cause the banks’ percentage of this market to fall over time…We see it as a much slower burn.”
Funds weren’t competing directly with the banks, he said, instead taking opportunities where banks could no longer play, such as the property debt market, which demanded stricter loan-to-valuation ratio (LVR) targets of 55 per cent, compared with 65 per cent previously, he said.
First State Super portfolio manager Ross Pritchard said the fund had underwritten four transactions in the last year and was looking at two more.
“We’re seeing this margin about deals they used to do, clients they want to support but don’t have the same access to capital as they used to,” he said. “That is where we’re seeing an opportunity.”
