Banks appointed as Pepper readies for $1bn IPO

Non-bank lender Pepper is targeting a May ASX listing with three banks lined up to help manage the potential $1bn IPO.

Pepper Australia CEO Mario Rehayem. Picture: Supplied

Non-bank lender Pepper is targeting an ASX listing in May and has three investment banks lined up to help manage the potential $1bn process.

Pepper is understood to have tapped Citigroup, Credit Suisse and Macquarie Capital to manage the initial public offering, as revealed by The Australian on Thursday. KKR Capital Markets is also on the ticket.

Independent adviser Reunion Capital Partners and the vendor, private equity giant KKR & Co, have got the ball rolling on the 2020 float by making the appointments.

KKR took Pepper off the ASX in 2017 in a $657m takeover, snapping up its operations which spanned Australia, Asia and Europe. The latest Pepper IPO will, however, only include the Australian operations, where it is a lender of traditional mortgages and nonconforming or “near prime” loans, which typically sit outside the banks’ lending criteria. Pepper also has car and equipment finance lending operations here and a loan servicing business.

A Pepper spokeswoman declined to comment on the company’s IPO plans.

Pepper’s Australian assets have grown as non-bank lenders have benefited from tougher credit assessments at the major banks following the Hayne royal commission.

A presentation to Pepper’s debt investors showed the group had lending assets of $14.4bn globally and 600,000 customers as at December 31 last year. In Australia, Pepper’s lending book was $10.7bn, up from almost $7bn in 2017, while its third-party loan servicing book dipped to $1.6bn from $1.8bn.

Loan originations in the car and equipment finance unit jumped to $1.05bn in 2018.

Pepper Australia is run by Mario Rehayem while the company’s founder Mike Culhane is group chief executive.

Under the float plans, Mr Rehayem will lead the ASX-listed company.

The IPO preparations follow a push by Pepper into New Zealand last month, after the company identified “a gap” in that market.

Pepper’s NZ office will be in Auckland and offer prime, near-prime and other specialist loans.

But potential investors in Pepper are first trawling the prospectus of another local financial services company.

The $4bn float of consumer finance group Latitude will prove the litmus test for the domestic IPO market.

It lodged a prospectus with the corporate regulator last week outlining plans to raise as much as $1.4bn and deliver a bumper payday to CEO Ahmed Fahour.

The Latitude deal comes amid a quiet year for listings and marks the largest raising via an IPO since Viva Energy’s float last year.

Potential investors in Latitude and Pepper will be closely monitoring volatility in financial markets amid nervousness around the finance sector and credit quality as loan arrears edge up.

Higher arrears will, however, be offset somewhat by the Reserve Bank of Australia’s third cut to official rates in 2019 which occurred earlier this week.

Moody’s Investors Service this week provided an industry snapshot of the performance of tranches of home loans that are packaged up and sold to investors.

The report said the 30-day-plus delinquency rate for prime Australian residential mortgage-backed securities (RMBS) increased by 10 basis points during the June quarter, reaching 1.67 per cent. Moody’s also tipped the rate will continue to rise through the remainder of the year.

The 30-day-plus delinquency rate for nonconforming RMBS was 3.68 per cent in June 2019, up from 3.25 per cent three months earlier and 2.54 per cent in June 2018.

Moody’s doesn’t see any sort of acute borrower stress though.

“Mortgage delinquencies will only increase moderately,” the report said, reflecting that defaults and losses would remain low as house prices resumed their rise and interest rate cuts supported borrowers’ abilities to repay mortgages.