Except from an AFR article today.
In Australia, the negative effects of the fastest tightening cycle in three decades on the non-banks is being amplified by the fact big banks are still benefiting from cheap RBA money in the form of the term funding facility that was put in place to keep credit flowing during the pandemic.Even as the playing field starts to tilt back into balance, when the big banks have to revisit funding markets made increasingly treacherous by the fallout of SVB, and pay more for deposits over the coming 18 months, the blows won’t cease. Instead, many smaller non-banks are now struggling to hold on to their bank-funded warehouses, or shore up securitisation funding in a scarce market for credit.
analyst Carlos Cacho says while the banks’ warehouse facilities are “committed” and can’t be easily abandoned, they will come at a steeper price. “That said, I suspect they may be less willing to offer new ones, or more likely, the pricing for them will increase,” he says.As talk increases that lenders such as National Australia Bank and Westpac are becoming more wary of pricing their funding outside the reach of some of their heavily battered competitors, questions are circling on which lenders are actually differentiated enough and profitable enough to survive.MoneyMe neatly sums up the challenges facing the non-banks right now: it took on debt to fund its merger with SocietyOne, interest charges increased, and when the lender tried to get away a $20 million equity raising in February last year, it instead landed deeper in the arms of Pacific Equity Partners.It has until June to muddle its way out of a debt burden at its head company level that will likely require it to offload all or parts of its personal lending business. Of the $75 million owed on a facility extended at its head company level, it needs to find $25 million by the first quarter of the 2024 financial year, with PEP expecting a deal to be announced by June.
MoneyMe chief executive Clayton Howes says the lender has “ongoing interest from several credible parties, and we have, of course, planned for a variety of solutions”. The company also points to its interim profit of $8.79 million and work to cut operating costs as proof it has a future.AdvertisementBut auditors highlighted material risks about its ability to remain a going concern, and RBC analyst Wei-Weng Chen says “limited visibility into any potential capital transaction makes it considerably difficult to provide an investment view”.Following Credit Suisse’s spectacular fall on Thursday, MoneyMe shares plunged more than 17 per cent to just 12¢, suggesting even the window for a deeply discounted rights issue may have now closed, with its market cap at $34 million.On the question of a raising, Howes says: “MoneyMe is assessing all options available to us under the
strategic capital initiative with Morgan Stanley.”Andrew Brown, from hedge fund East72, is perhaps even more blunt than ASR’s Hartnett in summarising the challenges ahead as funding costs skyrocket: “If the equity markets close, basically these things die because the expense base is just horrendous. It’s crazy,” he says, speaking broadly about financial services juniors. “And you can – if you want to be a bit generous – argue ‘well, there are a million businesses that have started out losing quite significant amounts of money’. But the equity market has been prepared to buy the sort of medium to long story.”Unlike Credit Suisse and SVB, the non-banks in Australia don’t take deposits, so they’re not at risk of a so-called bank run, as customers withdraw their money in fear. This has been a competitive disadvantage for them as the banks have played the arbitrage between cheap deposit funding and cheap RBA money against rising rates charged to borrowers, to perfection.
AdvertisementWith its shares still suspended at 20¢ and operations stopped by the receivers, Openpay’s collapse put the spotlight on the once-hyped buy now, pay later sector. Many are wondering which lender will fall next, with MoneyMe looking the most susceptible.
Zip has the remainder of a $400 million convertible note hanging over it, after it struck a deal to convert $70 million – or 17.5 per cent – at 24¢ in the dollar in December.Metrics Credit Partners has taken over the board at Payright, while Earlypay is also understood to be reeling after having written off one big debt and now facing questions about its invoice financing.
SVB customer Laybuy delisted from the ASX and moved to New Zealand.Auditors at Zip highlighted the same “going concern” risks as those at MoneyMe, and no one can definitively say how Zip will repay the convertible note now that it has abandoned hope of achieving “scale” big enough to underpin its cost base.The trouble for most of the struggling buy now, pay later sector and the consumer lenders is that there is no profit to cushion the blow of higher costs
.AdvertisementArguably the bad debts are still looming, but the receivers called in to pick over the bones at Openpay found a company unable to reduce operating costs fast enough to offset the weight of ever-higher funding costs.“This is not a story of asset quality, this is a story of access to finance,” says one banker to the sector.“Lenders can now see that these guys didn’t make money in the best conditions ever for non-banks, so they’re asking, ‘how are they ever going to make money now with interest rates heading higher and higher?’ ”Buy now, pay neverBad debts are not the focus, but they undoubtedly stopped the buy now, pay later juggernaut in its tracks in mid-2022 when it became clear the model was a product of the era of lower interest rates.
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