CBS funding warehouse, RMBS programme to expand with birth of Heartland Bank

The Canterbury Building Society (CBS) says its new NZ$100 million securitization programme will probably be expanded should its proposed merger with Pyne Gould Corporation’s Marac Finance and the Southern Cross Building Society go ahead.

(Updates add comments from interview with Bryan Inch, plus more detail).

CBS outlined plans on Friday to raise up to NZ$100 million through a funding warehouse and ultimately a residential mortgage backed securities (RMBS) programme to diversify away from its complete reliance on retail funding sources and bolster its lending facilities.

The funding programme will see CBS selling residential loans at face value to a Warehouse Trust that it will establish. The trust will be funded to buy the loans from CBS through a loan provided by Westpac.

CBS chief executive Bryan Inch told interest.co.nz the programme had been in train before the merger talks and PGC and Southern Cross had been told of the plans early on.

“Until such time as the merger proposal is finalised it’s business as usual so we wanted to make sure we were giving CBS Canterbury the best opportunity going forward,” said Inch.

Merger talks between Marac, CBS and Southern Cross to create a so-called Heartland Bank were announced in June.

“If the merger proposal goes ahead this facility will more than likely be expanded. It’s a logical type of facility for the merged entity as well,” Inch added.

Ultimately the second stage of the programme will see CBS establish further trusts to buy the residential loans from the Warehouse Trust, funded through the issue of debt notes to selected institutional investors. This will involve different classes of debt ranking in descending order of priority for principal and interest payments with the lower ranked notes receiving a higher interest rate to compensate for the greater risk.

Inch said the warehouse facility and ultimately RMBS programme would take CBS away from its 100% reliance on funding from retail investors. Although CBS has had a NZ$30 million standby loan facility in place from Westpac, it has never drawn this down and it wasn’t designed to be drawn on a regular basis. CBS will start drawing on the new loan facility almost immediately, in proportion to its general growth and deposit reinvestment rate, Inch said.

However, the pricing and selling of any debt products, which will be handled by Westpac, was probably 12-18 months away.

The Warehouse Trust and other trusts will be special purpose trusts established and administered by Trustees Executors. CBS won't have any entitlement to the capital or income of the trusts. A charitable trust established by CBS will be the residual capital and income beneficiary of the trusts. CBS will, however, manage the trusts for the trustee and be paid management and servicing fees.

The residential mortgages sold to the Warehouse Trust by CBS will cease to be assets of CBS, becoming assets of the Warehouse Trust and therefore be security to Westpac as the loan provider.

CBS will proceed to the second stage of the programme - establishing additional trusts to buy the loans from the Warehouse Trust funded through the debt issue - when the Warehouse Trust has taken on board loans valued at at least NZ$75 million. Under the terms of its loan from Westpac, CBS is obliged to provide a subordinated loan to the Warehouse Trust equivalent to at least 5% of the value of the loans held by the Trust.

In April Inch told interest.co.nz CBS was talking to its bank Westpac about wholesale funding given the “very competitive” retail funding market which it relied on for all its funding.

Faced with new Reserve Bank regulations introduced in April, that mean they have to get at least 65% of their funding from retail investors or bonds with maturity terms of more than one year, the big banks are now competing more strongly for retail term deposits.

“As the majors turn the switches on and off on that demand for retail funding it puts businesses like ours under a lot more pressure because we’re so much smaller,” Inch said.

“But also things like the Crown retail deposit guarantee has got to go through a roll over phase and this (warehouse and securitization programme) helps protect is from any reactions that may exist in the market because of that and/or any further finance company collapses.”

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