Non-bank financial institutions | WHERE ARE THEY NOW?

Acquired by CBA IPO 2015

Homeloans / RESIMAC merger Media speculation about sale

Media speculation about sale IPO 2015

Media speculation about sale

Non-bank M&A on the riseThe last few years have seen a number of non-bank financial institutions active in the M&A and capital markets. Some recent transactions include: The merger of RESIMAC and Homeloans  The ASX listing of non-banks Eclipx and Pepper.

There is also current market speculation in relation to a number of other non-banks, including La Trobe Financial, Firstmac and Flexigroup.

Non-bank financial institutions have become involved in M&A transactions over recent years in order to grow in an increasingly competitive market. The IPOs of non-banks have allowed them to gain

access to other sources of funds at a reduced cost of capital, so they are able to pursue greater scale of growth and acquisitions. This also gives rise to greater synergies for these non-bank financial institutions, including the expansion of distribution channels and additional growth opportunities in key market segments.

In addition, there is growing interest in investment in non-bank financial institutions on the basis of the strength and reputation of their brand, their increasing presence in the market as a result of the withdrawal of traditional lenders from some sectors and the opportunity for investors to diversify financial service offerings more competitively

Spring 2016

FINSights: New Trends in FS

Origination, servicing and management fees – the fees generated by undertaking these activities are a primary source of revenue for the sponsor. The fee levels, their position in the payment waterfalls, and the termination rights, are therefore key to determining the value of the entity. 

Broker fees – a number of non-banks rely on a broker network to originate receivables. The quantum and payment obligation of these fees can substantially impact on the return to the sponsor. 

Indemnities – there are certain market standard indemnities typically included in the domestic securitisation transactions. To the extent that the indemnities provided substantially differ from the market standard, there is likely to be a pricing impact on any transaction. 

Net interest margin – originators sometimes sell their net interest margin to financiers, in order to raise working capital. These arrangements need to be considered carefully to ensure the impact of the arrangements is well understood.

Victoria AllenT: +61 2 9921 4567M: +61 434 565 615E: victoria.allen@minterellison.com

John EliasT: +61 2 9921 4115M: +61 421 271 077E: john.elias@minterellison.com

Buy-side – Top tipsOne common theme across these institutions is that the current funding is provided through securitisation, in both the private warehouse market and the public term market. The nature of this funding is one of the fundamental drivers of the business, and would need to be clearly understood as part of any M&A process. Some of the key issues include:

Subordinated funding arrangements – originators are often required to provide subordinated funding in respect of their asset base. Again, the terms of any such subordinated funding arrangements will be a key driver of the return provided by the asset portfolio. 

Target support arrangements – some financiers impose threshold rate requirements, such that there may need to be threshold rate support mechanics included. The terms of these may adversely impact on cashflow to the originator, and therefore need to be closely reviewed. 

Payment waterfalls – the payment waterfalls are fundamental in assessing the risk of cashflow being impeded, so this needs to be assessed in the context of all events in the life of the transaction. 

Licensing – credit licensing issues can have an adverse impact on the ongoing viability of a transaction, as well as raising important reputational issues for any purchaser.

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