End of the Term Funding Facility = Greater opportunity for Non-bank SME Lenders
When the COVID-19 pandemic got going in early-2020, the Reserve Bank of Australia established the Term Funding Facility (TFF) to offer low-cost three-year funding to authorized deposit-taking institutions (ADIs, often referred to as the Banks). This facility essentially provided the Banks with access to extremely low-cost funding (at a flat 0.10 per cent fixed for 3 years) for the period up until 30 June 2021, when new drawdowns ceased.
The Banks on-lent that money, often at exceptionally low rates of interest, and often fixed for periods of two, three or even four years.
Whilst the facility was closed to new drawdowns on 30 June 2021, at which time $188 billion was outstanding, the Banks retained access to the funding they had drawn on for up to 3 years with the final TFF borrowings maturing on 30 June 2024.
The objectives of the TFF were:
- To reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of the Banks and in turn help to reduce interest rates for borrowers. It complements the reduction in funding costs from the Reserve Bank’s target for three-year Australian Government bond yields.
- To encourage the Banks to support businesses during a difficult period, as the Banks could access additional low-cost funding if they expanded their lending to businesses. The scheme encouraged lending to all businesses, although the incentives were stronger for Small and Medium Sized Enterprises, or SMEs.
- The Banks enjoyed favourable capital treatment for non-residential secured SME loans throughout the pandemic with the Federal Government Coronavirus SME Guarantee Scheme guaranteeing 50 per cent of any losses on eligible loans written under the program.
With the TFF rolling off in mid-2024, it seems likely the Banks will not refinance a portion of the loans they funded with the support of this facility, and as such these borrowers will seek funding elsewhere. That is the closure of this scheme means that refinancing many of the SME loan exposures will prove to be a relatively unattractive option for the Banks economically.
The result of the Banks stepping back creates additional quality investment opportunities for the non-bank lenders with capital to deploy, and means products like the Aura High Yield SME Fund and the Aura Core Income Fund have a greater ability to pick and choose high quality SME borrowers.
To recap, the Aura High Yield SME Fund, designed for wholesale investors with a minimum initial investment of $100,000, delivered investors a net return of 8.31 per cent, assuming reinvestment of monthly income, over the calendar 2022 year; a period when most other asset classes delivered a negative return.
And for retail investors with a minimum initial investment of $25,000, the Aura Core Income Fund was launched with Montgomery’s assistance on 4 October 2022, and has delivered a total net return of 1.51 per cent, assuming reinvestment of monthly income, in its first three months of existence.
A more detailed piece on the conclusion of the Term Funding Facility will be released shortly.
If you would like to learn more about the Aura Core Income Fund, please visit the fund’s web page to learn more: Aura Core Income Fund
If you would like to learn more about the Aura High Yield SME Fund (wholesale clients only), please visit the fund’s web page to learn more: Aura High Yield SME Fund
You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.
Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.
The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230).
You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through a valid paper or online application form accompanying the PDS. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.
The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).
Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.
Montgomery, ACH and OMIFL do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
