The Federal Government has introduced several measures to address the negative impact of the COVID-19 pandemic on the Australian economy.
This note outlines four measures that are directly relevant to many non-ADI financiers. Three of these measures concern access to funding and financial support. We will then consider two of those three funding measures in more detail.
Each non-ADI financier needs to assess:
- which funding and financial support measures are best suited to its business; and
- the optimal way to access funding under those measures, and their interaction with existing funding and securitisation arrangements.
||Relevance to non-ADI financiers?
|Coronavirus Economic Response Package Omnibus Act 2020 (Cth)
- Demands issued after 24 March 2020 under the Corporations Act 2001 (Cth) (Corporations Act) (ie, statutory demands) cannot be issued for amounts less than $20,000 (up from the usual minimum of $2,000).
- Bankruptcy notices, petitions or declarations issued or presented after 24 March 2020 under the Bankruptcy Act 1966 (Cth) cannot be for an amount less than $20,000 (up from the usual minimum of $5,000).
- The deadline for compliance with a statutory demand or a bankruptcy notice is extended from 21 days to 6 months.
These changes remain in place for 6 months from 24 March 2020.
Importantly, court proceedings can still be taken to enforce and recover debts.
Directors’ obligations in relation to insolvent trading
Directors now have an additional safe harbour (over and above the safe harbour introduced in the Corporations Act in 2017). If they act honestly, they won’t be liable for insolvent trading in relation to debts incurred in the ordinary course of their company’s business for 6 months from 24 March 2020. If the company goes into administration or liquidation during this period, this safe harbour will cease to apply for debts incurred after that time.
|Australian Business Growth Fund (Coronavirus Economic Response Package) Act 2020 (Cth)
||This Act establishes the Australian Business Growth Fund. This Fund enables the Federal Government to inject equity finance into qualifying businesses across a range of industries and locations.
In a 2019 media release regarding the Australian Business Growth Fund Bill 2019 (which is superseded by this Act), the Treasurer announced that established Australian businesses will be eligible for long-term equity capital investments between $5 million and $15 million, where they have generated annual revenue between $2 million and $100 million. It is not clear at the time of writing this article whether these criteria continue to apply or whether they have been broadened to increase the availability of funding.
|Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Act 2020 (Cth)
||Under this Act, the Federal Government may grant a guarantee to ADIs (banks) and non-ADI financiers in connection with loans made or to be made to SMEs. The scheme will be available for 6 months, from April to September 2020.
ADIs and non-ADI financiers may seek to utilise this package to offer a loan product to the market, including to assist any customers affected by the COVID-19 pandemic.
|Structured Finance Support (Coronavirus Economic Response Package) Act 2020 (Cth)
||The Act allows the Federal Government through the Australian Office of Financial Management (AOFM) to provide support to funding markets for SMEs affected by the COVID-19 pandemic.
The AOFM is to make targeted investments in the structured finance markets utilised by smaller lenders that provide consumer and business finance, investing in rated term securitisations (eg RMBS) and rated and unrated securitisation warehouses.
Guarantee of Lending to Small and Medium Enterprises
The Government is to provide a guarantee in favour of eligible lenders to the extent of 50% of certain loans made by those eligible lenders.
Those loans are:
- made to SMEs, including sole traders, with a turnover of up to $50 million;
- in an amount of no more than $250,000 per borrower;
- made with a term of up to three years, with an initial 6 months’ repayment holiday; and
Overall, $40 billion will be appropriated for the purpose of making these guarantees.
Eligible lenders include ADIs (banks) as well as non-bank financiers.
Broadly, non-bank financiers are corporations carrying on business in Australia that have debts due to them (arising from the provision of finance) that exceed $50 million, including in the most recently ended financial year.
It is expected that more information will be available in the coming days.
If you are a non-bank financier, you may wish to consider a loan product that satisfies the above criteria. This product may help customers through this tough economic period – including by enabling customers to service wages, existing loans and other existing indebtedness. It would also provide the benefit of the 50% Government guarantee and, potentially, sit outside of existing funding and securitisation arrangements.
Responsible lending obligations do not currently apply to lending that is predominantly for a business purpose. Nonetheless, to help SMEs secure access to credit quickly and efficiently, the Government has foreshadowed an exemption from responsible lending obligations for lenders providing credit to existing small business customers. This exemption is to be for six months, and will apply to any credit for business purposes, including new credit, credit limit increases and credit variations and restructures.
ADIs (banks) and non-ADI financiers should act quickly to engage with the Treasury, should they wish to consider offering a loan product to the market utilising these initiatives.
Structured Finance Support Fund
The Structured Finance Support (Coronavirus Economic Response Package) Act 2020 (Cth) establishes the Structured Finance Support Fund (SFSF). The SFSF will initially be credited with $15 billion, and the Government may subsequently credit additional amounts to the SFSF.
The SFSF is to enable the Government to support access to funding markets for SMEs affected by the COVID-19 pandemic. It is also intended to mitigate adverse effects on competition in consumer and business lending markets.
The SFSF will be administered by the AOFM. The AOFM will make targeted investments in the structured finance markets utilised by smaller lenders that provide consumer and business finance, investing in rated term securitisations (eg RMBS) and rated and unrated securitisation warehouses.
If you are a non-bank financier, you may wish to approach the AOFM directly or via your securitisation or warehouse arranger or provider. If you approach the AOFM directly, you should ensure that your proposal is realistic and reasonable.
Our team is helping several non-bank financiers to assess the options open to them to access SFSF funding. Please let us know if we can assist you.
The Treasurer’s direction to the AOFM mandates the following priorities, decision-making process and investment risk and return criteria in investing the SFSF.
The AOFM has been directed by the Government to prioritise the following:
- investments that provide support to ‘smaller lenders’ that have lost access to reasonably priced funding due to the economic effects of the COVID-19 pandemic. A ‘smaller lender’ is either:
o a bank which does not have access itself or via its parent to a term funding facility provided by the Reserve Bank; or
o a financier which has lent or otherwise financed indebtedness exceeding $50 million, including in the most recently ended financial year;
- investments that maintain and encourage investment by the private sector in the securitisation market for smaller lenders;
- investments that are likely to promote competition in the securitisation market for smaller lenders;
- investments that are structured so as:
o not to restrict renegotiation by smaller lenders and debtors of arrangements for making payments under contracts for credit; and
o to allow smaller lenders to provide forbearance to debtors in respect of payments under contracts for credit; and
- investments that do not adversely affect the capacity of smaller lenders to provide credit.
Investment decision-making process
In making an investment, the AOFM must consider:
- whether the investment will be consistent with the priorities outlined above;
- the potential of the investment to affect other participants or prospective participants in the securitisation market for smaller lenders, having regard to the policies outlined above;
- if the investment would be made at a rate of return that is less than the market rate, whether the investment is reasonably required, having regard to the policies outlined above and the decision-making process specified here;
- whether the investment would be appropriate, having regard to the investment risk and return considerations specified below; and
- whether the investment is consistent with the Act.
Investment risk and return
In making investments, the AOFM must:
- ensure that investments have an acceptable level of risk, including risk to the Commonwealth balance sheet, noting that credit losses may be higher in the short to medium term, owing to the COVID-19 pandemic; and
- aim to achieve a positive net financial return over the medium to longer term.
Non-bank financiers need to move quickly yet strategically, should they wish to access either or both of the:
- Guarantee of Lending to Small and Medium Enterprises
- Structured Finance Support Fund (SFSF).
New products may need to be developed and existing products may need to be changed, both without adversely impacting on existing warehouse and securitisation programs. We can assist.
If you have any questions about this article, please contact the authors, or any member of our Banking & Finance team.
This information and contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.