Credit Suisse slump: End of easy money for non-bank lenders
Credit market turmoil following the forced rescue of Credit Suisse could create challenges for Pepper Money, Metrics, Latitude Financial, Humm Group and La Trobe Financial.
The near failure of Credit Suisse and actual collapse of Silicon Valley Bank may halt the growth of non-bank lenders, with new credit lines from the big four banks likely to grind to a halt and the spread on wholesale funding widening over the past ten days.
The rescue of Credit Suisse by UBS - a move forced by Swiss regulators over the weekend - has done little to ease concern in credit markets.
Panic initially ramped up when SVB - the 16th biggest bank in the US - failed two weeks ago and Blackrock warned that collapse could be the start of a “slow rolling crisis” in the US financial system.
While Australia’s banks are not likely to suffer serious funding shocks - apart from the rising cost of money - non-bank lenders and buy now pay later operators are heavily dependent on credit lines from those banks who are expected to rein in riskier lending.
Making the situation worse for non-bank lenders and the BNPL sector, the spread on non-rated bonds widened from 5 to 12 per cent over the last ten days, marking the end of easy wholesale funding.
“Credit standards and limits are tightening up significantly and it will be interesting to know what the repercussions will be for the non-bank finance industry,” said Investors Mutual founder Anton Tagliaferro. “It’s not looking too flash at the moment.”
The types of companies that may be exposed to a squeeze on new capital include Pepper Money, Metrics, Latitude Financial, Humm Group and La Trobe Financial. However many of these companies may not currently require new funds.
Humm chief executive officer Rebecca James said her company, had recently shored up funding arrangements and was increasing “market share while others are retreating.” “Humm continues to enjoy access to funding – having recently established new funding arrangements and completed a number of successful securitisations in the last six months,” Ms James said.
“As the hype and valuations of pure-play BNPL companies comes back down to earth, those companies that relied on excessive top line growth driven by pricing below the cost of capital will find it increasingly difficult and expensive to access capital needed to fund their operations.”
Humm has $103m in unrestricted cash and $1.1bn of undrawn warehouse facilities, the company said at its half year result.
Non-bank lending has grown dramatically in Australia and around the world as businesses in particular look to borrow more quickly or for shorter time periods than banks can provide, and as the popularity of the buy now pay later sector has surged.
The market accounts for about five per cent of the financial system in Australia, according to the Reserve Bank of Australia, which said non-bank warehouse facilities account for about one per cent of the Australian banks’ asset base.
National Australia Bank, ANZ, Commonwealth Bank of Australia and Westpac all lend money to non-bank lenders. None of the banks would comment on what measures they were taking with non-bank borrowers at this time.
Mr Tagliaferro said they will be acting more cautiously when it comes to letting non-bank lender borrowings roll over.
“We could be in for a credit squeeze and a period of credit rationing where secondary institutions struggle to roll over debt,” Mr Tagliaferro said.
Credit Suisse, SVB demise highlights risks to mum and dad investors
In Australia, the non-bank lending market has grown rapidly according to a report last year by IBISWorld, “Non-depository financing revenue has increased by an annualised 11.2 per cent to an expected $22.3 bn over the past five years, including a rise of 3.5 per cent in 2022-23,” IBISWorld said in a note.
In its report 12 months ago IBISWorld predicted growth was likely to continue for the next five years. But this came before the issues with European and US banks.
The bleak situation around funding costs now facing non-bank lenders in Australia is a reflection of what is taking place across the globe.
Ratings company S&P last week warned that for the North American market where it rates non-bank lenders with about $US108 billion of debt maturing over the next five years, some companies may struggle to refinance.
“In 2023, we believe debt markets may not meet new funding needs at satisfactory conditions for some non-bank financial institutions in North America,” said S&P credit analyst Igor Koyfman.
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