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Pepper to be snapped up for $675m
James Mitchell
11 August 2017
https://www.mortgagebusiness.com.au/breaking-news/11368-pepper-to-be-snapped-up-for-675-million
California-based investment manager KKR will pay a significant premium to acquire non-bank lender Pepper after the group today announced that it has entered into a scheme implementation deed. The board of the ASX-listed non-bank lender announced on 10 August that it has entered into a scheme implementation deed with an entity owned by California-based KKR Credit Advisors.
The KKR entity, known as Red Hot Australia Bidco, has proposed to acquire all of Pepper’s shares. If granted, Pepper shareholders will receive a cash payment of $3.60 per Pepper share plus a 3 cent dividend. With more than 181 million shares on issue, KKR will acquire Pepper for close to $675.9 million, $37 million more than the current market cap of $638 million. Pepper shares were valued at $3.43 before the market opened this morning.
“After careful consideration, we believe this offer is consistent with the board’s efforts to deliver maximum value for shareholders,” Pepper group chairman Seumas Dawes said. “We believe it represents a compelling opportunity for shareholders, allowing them to choose to either obtain liquidity for their shares at an attractive valuation or remain invested in the Pepper business.”
Mr Dawes controls 29.7 per cent of total shares. Shareholders may also choose a scrip option, enabling them to retain an interest in the Pepper business. Pepper’s board has recommended shareholders vote in favour of the scheme, which — in addition to shareholder approval — is subject to a number of conditions, such as Foreign Investment Review Board (FIRB) approval and the approval of other local and foreign regulatory bodies, given Pepper’s business interests in Ireland, Korea and the UK.
From comments below second article below..
1. The issue is whether customers will be able to access their funds in redraw or these quasi offset accounts if the lender had a liquidity issue. From memory I think the old RAMS froze redraw during the GFC. I presume accessing funds in these quasi "offsets" could be effected in the same way.
2. The issue is whether customers will be able to access their funds in redraw or these quasi offset accounts if the lender had a liquidity issue.
From memory I think the old RAMS froze redraw during the GFC. I presume accessing funds in these quasi "offsets"
could be effected in the same way?
ASIC warns non-bank lenders over misleading offset accounts
11 October 2016
Michael Bennett
The corporate regulator has warned non-bank lenders about their marketing of mortgage offset products, saying consumers could be misled in believing they operated in the same way as accounts offered by traditional banks that are covered by a government guarantee.
With the popularity of offset accounts soaring in recent years, non-banks have offered mortgages with offset features, despite not being “authorised deposit-taking institutions” that are regulated by the Australian Prudential Regulation Authority.
Non-banks use products such as offset redraw facilities that are not covered by the government’s financial claims scheme, which guarantees bank deposits, including offset accounts, up to $250,000 if lenders fail.
An Australian Securities & Investments Commission spokesman told The Australian: “Non-ADI lenders should ensure that they include sufficient disclosure about the nature of the loan product features in loan agreements with consumers, to ensure that consumers are not potentially misled as to the nature of the loan product features.”
In a study last year, the Reserve Bank found cash in bank offset accounts had soared to $90 billion after annual growth of about 30 per cent in recent years. There was an additional $120bn available to be withdrawn from “redraw” loans after growing by nearly 10 per cent.
In the competitive mortgage market, offset accounts are considered costly for banks because they reduce
interest income and APRA requires them to have regulatory capital for the whole loan because of the risk
customers could quickly use up offset accounts.
Consumer advocate Christopher Zinn said home loans were complex and it was important to explain matters like the government guarantee. While offset funds at non-banks might just pay down a borrowers’ loan if the lender failed, Mr Zinn said the process wasn’t simply explained and people could quickly need the money that had been set aside for other purposes.
“It really doesn’t seem transparent enough,” he said, adding mortgage brokers should also point out the differences in offset products.
Non-banks, which are regulated by ASIC, have enjoyed better conditions since the global financial crisis as the residential mortgage-backed securities funding market reopened and banks tightened lending to customers deemed more risky. Pepper Group rode the wave to float on the stockmarket last year and performed well for investors before recently slipping below its initial public offering price of $2.60 as credit growth slows and “bubble” fears linger in markets such as Sydney.
Firstmac, the nation’s biggest non-bank, also recently struggled to attract fresh investment, despite flagging pre-tax profit for the year to June 30 had grown to around $23m from $9m on stronger volumes from subsidiary loans.com.au. According to comparison site finder, loans.com.au is offering some of the sharpest rates in the market for loans with offset features, charging just 3.49 per cent a year for a $600,000 “offset” mortgage. On its website, loans.com.au refers to the product as both an “offset redraw account” and “offset redraw facility” that provides “unlimited access to your funds”.
A spokesman for loans.com.au said statements on the website and in marketing materials were “accurate”. “It is clear from the website, the applicant’s scripted phone conversation with the lender, the context of the account opening process and the terms and conditions of the loan, that it is not a deposit account and that we are not a bank,” he said.
Describing how the product operated, the spokesman said borrowers’ sole loan account included a 100 per cent interest offset redraw facility using an “offset sub-account”. Borrowers can then make additional repayments to the offset sub-account within the loan, with amounts displayed separately. Redraws can be made against the loan balance or offset sub-account.
Michael Saadat, ASIC’s senior executive, deposit takers, credit and insurers, has previously suggested that borrowers check whether a non-bank holds the offset account separately with an ADI because these would be guaranteed by the government, in contrast to redraw facilities which are not.
Pepper Home Loans Is Having To Fight Comparisons Between Its Loans And The US Sub-Prime Market
24 April 2014
Greg McKenna
Last week Business Insider reported that Australian non-bank lender Pepper Home Loan had issued $500 million of residential mortgage backed securities (RMBS). It was the biggest “pure non-conforming RMBS transaction completed since the financial crisis” according to Sarah Samson, Director, Debt Markets, National Australia Bank Limited which was co-lead on the deal. This fact seems to have worried some financial commentators and raised concerns about sub-prime style lending in Australia. Last week on the ABC’s PM program Digital Finance Analytics likened Peppers issue and lending was likened to US sub-prime mortgages. At issue seems to be the place that Pepper holds in the Australian Lending Market and the types of loans they write and the customers and borrowers to whom they lend.
On its website Pepper says: Our home loan products have been developed to meet the needs of borrowers who are unable to meet the lending criteria of traditional lenders and mortgage insurers. So non-traditional lending at least. The PM program reported:
Martin North says it’s a model not unlike the subprime mortgages that were packaged up by big investment banks in the United States in the years before the global financial crisis. The banks involved included Lehman Brothers and Bear Stearns, which collapsed when the subprime bubble burst, unleashing market chaos and an almost global recession.
That is a worrying scenario in anyones language. While North sought to clarify by saying that in Australia such loans only made up one or two percent of loans, Pepper co-CEO Patrick Tuttle has sought to set the record straight, telling Banking Day that the suggestion “these loans equate to US sub-prime is just nonsense.” Tuttle went on:
As far as we’re concerned this is just business as usual… In fact, the market should be welcoming the fact that we can fund ourselves reasonably efficiently, and see that as a sign of returning competition to the non-bank sector.
Indeed local treasurers and the market should, because it’s not just Pepper looking to diversify their funding at the moment. Indeed under APRA’s new standard, APS 210, all Australian ADI’s (banks, building societies and credit unions) even smaller ADI’s who have or are still funded by deposits, need to diversify their funding base and perhaps look towards securitisation as a form of funding to show they can always remain liquid. Underlying the hullabaloo around the Pepper deal is a potential misunderstanding of the material differences between non-conforming in Australia and sub-prime in the US. Sub-prime lending in the US is a “completely different animal” according to Tuttle. “In many cases, the borrowers didn’t even have jobs and were being given loans by US lenders.” Non-conforming loans in Australia on the other hand are just that – they don’t conform with traditional credit approval criteria or automated scoring models. They require a more old-style bank manager approach in many cases.
Tuttle said that Pepper does a lot of the underwriting (credit approval) manually and that “Typically, these customers might be looking to consolidate more than three or four credit cards and a personal loan into their mortgage and thereby exceed debt limits; may have had an illness or a divorce or were temporarily unemployed and therefore have “a black mark” on their credit bureau report; or are self-employed but late with their tax returns, requiring a lender to confirm their income through alternative means, such as business activity statements.” Crucially Tuttle added: “Our processes allow us to verify their capacity to repay their loans.” This is the key difference between Australian non-conforming loans and the sub-prime loans in the United States that precipitated the crisis.
Under Australia’s National Consumer Credit Protection Act a credit provider must take reasonable steps to verify the applicant’s financial status, and that they can repay without undue hardship That makes all Australian mortgage lending and all Australian mortgage lenders subject to such a test. That is, a lender must undertake a test of the borrower to satisfy themselves, under law and with the threat of penalties, that the borrower can repay the loan on the terms on which it is extended. It’s black letter law that codifies Australian lending practices and one of the reasons the performance of Australian mortgages and arrears has always been so healthy by international standards. It is also why Patrick Tuttle says comparing the loans his firm writes to sub-prime in the US is nonsense.
Warning to our Readers: Tuttle is full of Propaganda and twisted truths…………..as proven in the above article. For example:
Crucially Tuttle added: “Our processes allow us to verify their capacity to repay their loans.”