Bankers weigh options for Pepper Money

Pepper Money chief executive Mario Rehayem.

Suitor BGH Capital may have walked away from Pepper Money but that has not stopped investment bankers turning their minds to how they can gain a valuation uplift for the lender.

With the latest full year results out last month, it’s clear that the company is kicking goals in its asset finance operations, but prime mortgages and its Stratton Finance investment continue to be tough going, which is why some think a
break-up of the business could be under consideration.

Asset finance could be sold for a high valuation and its prime mortgage book could be placed into run off.

The suggestion is that investment bank Citi has been canvassing options for Pepper Money in recent months.

For the six months to June, mortgages under management, comprising 56 per cent of the company’s income, fell 8 per cent from December to $12.4bn.

Asset finance is now 41 per cent of its income compared to 36 per cent six months ago.

Its net profit was $52m, down 25 per cent on the second half of 2022.

Chief executive Mario Rehayem said that during the period the mortgage market had been challenging with intense competitive behaviour as the major banks sought to gain share through cashback offers and other incentives driving higher levels of customer attrition.

But he said the group capitalised on opportunities in the auto and equipment market, which had seen the business accelerate growth in its asset finance business to offset volume constraints in mortgages.

Asset Finance funds under management grew by 32 per cent on the previous corresponding period.

There had earlier been some chatter in the market that Pepper Money had considered a sale of its prime mortgages.

Non-bank lenders do better out of subprime mortgages – mortgages not usually carried by banks such as for those who are self-employed.

The challenge for groups like Pepper is that top banks have to hold only $2 for every $100 of risk-weighted assets and mid-tier banks $4 for every $100. But
non-bank lenders need to hold far more capital.

Asset finance companies are performing strongly across the board.

Another is the non-bank lender Humm, which delivered a 20 per cent lift in earnings for its commercial finance unit for the 2023 financial year to $42.3m.

But in a similar way to Pepper Money, shareholders are not rewarding it for its strong performance and it could be a privatisation candidate, led by founder and major shareholder Andrew Abercrombie, with its market value just over $220m.

Other non-bank lenders such as Resimac and Liberty Financial could also wind back prime lending for the same reasons.

The sticking point for Pepper Money is that break up plays are never easy, although not impossible, as proven by BNK Banking Corp. BNK sold its Australian mortgage aggregator Finsure to MA Financial for $145m in 2021, with $60.8bn of assets under management.

Private equity firm BGH looked at Pepper Money earlier in the year, but walked away due to challenges funding its warehouse facilities.

Pepper Money listed as a business worth $1.3bn during the pandemic by Kohlberg Kravis Roberts, which still retains a 61 per cent holding.

One analyst said the challenge for Pepper Money is that it has grown too large for the banks to support its mortgages through their warehouse facilities.

Pepper Money secured $40m for its high yield bond issue last week at 6.75 per cent above the bank bill swap rate.