ScoMo to revolutionise small business lending

Christopher Joye

Coolabah Capital

I was proud to be able to help ScoMo develop his new and globally unique policy to invest an initial $2 billion into small business loans to reduce the cost of this credit, improve accessibility, and encourage competition all the while making a bucket load---tens of millions of dollars---of profits for taxpayers. The policy is modelled on the plan that I developed with Professor Joshua Gans during the GFC for the government to invest directly in securitised home loans (or RMBS) via the Treasury's AOFM, which it ended up committing $15 billion to. You can read my column outlining the proposal here or AFR subs can click here. Excerpt enclosed:

Under a plan to be announced by Treasurer Josh Frydenberg, the government will ask the Australian Office of Financial Management to invest an initial $2 billion into two bottlenecks in the financing chain connecting small businesses with investors that fund the money they borrow from the likes of Bank of Queensland, Liberty and Prosper.

The first will be into the "warehouse facilities", which are normally controlled by the big banks, that smaller banks and non-banks rely on as bridging finance to aggregate portfolios of SME loans before selling them to investors.

During the global financial crisis, these warehouses were often pulled, frozen, or became punitively expensive, allowing larger banks to crush their rivals.

Once a warehouse facility is full of newly originated SME loans, they are transferred into an "asset-backed security" (ABS), which is a bond backed by SME loans.

The lender then repays the warehouse with the money raised from investors, which enables a second round of SME lending to be initiated. And this process continues ad infinitum.

The government will invest its $2 billion alongside private investors in both the warehouse facilities, which is a global first, and the ABS bonds that replenish the warehouse.

This will allow the $2 billion to be continuously recycled, underwriting tens of billions of dollars of SME lending outside the majors. That's a big deal in a market where the total annual value of SME loans is about $80 billion.

Since the government will only be investing in highly rated warehouse facilities and ABS issues, it will bear little to no risk (no AAA-rated Australian securitisation has ever defaulted).

But it will be paid handsomely, earning an interest rate above the government bond yield, which is its cost of borrowing, of between 1.5 and 2.0 per cent annually.

This means taxpayers should capture almost risk-free revenue of $30 million to $40 million a year on the $2 billion investment, making the entire initiative highly profitable.

There is a powerful precedent via the government's successful, $15 billion co-investment with the private sector into the residential mortgage-backed securities(RMBS) market during the GFC.

As with ABS, the interest rate the government was paid on its RMBS was miles above its cost of borrowing, generating huge "carry" profits for taxpayers.

This particular policy, which I developed with Joshua Gans in March 2008, saved smaller banks and non-banks that were reliant on institutional funding, and has since powered the Aussie RMBS market into a massive $100 billion sector that is being underwritten by Asian and European investors. In fact, it has emerged as the second largest securitisation market in the world.

In a recent RMBS issue, a single Japanese bank bought $1.6 billion of the entire $1.75 billion deal. And if these overseas investors are willing to pour billions into our home loans while house prices are falling, there is no reason why they shouldn't have an even greater appetite for SME loans offering superior returns.


Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 26 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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