Thinktank’s evolution in residential lending and inaugural RMBS transaction


Thinktank’s evolution in residential lending and inaugural RMBS transaction

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When Thinktank, a specialist commercial and residential property lender, recently closed its first residential mortgage-backed securitisation (RMBS) issue for $500 million, it validated a strategy of diversifying from small commercial loans into the residential debt market.

In a COVID-19 environment, this diversification has allowed the company to weather the pandemic’s economic impact, to the extent that in the 12 months to 30 June 2021 it settled more than $1 billion in loans for the first time – a 33% increase on the previous financial year and an important milestone.

Back in 2006, when Thinktank opened its doors, residential debt was not on the radar. Instead, small commercial loans of up $3 million (although most transactions were much smaller) for the self-employed, professionals and small to medium-sized employers (SMEs) were the focus. The founding leadership believed there was a niche here for a conservative lender that understood this market better than the major banks and could deliver better loan products and faster turnaround times.

So it proved. When Thinktank closed its sixth and largest commercial mortgage-backed securitisation (CMBS) transaction of $600 million in October last year, it took the total of rated bonds issued to $2 billion. As with the other issues, it met with keen institutional demand in domestic (77%) and overseas (23%) markets and confirmed the company’s reputation as a prominent capital markets issuer in the commercial property asset class.

But obviously these self-employed, professionals and SMEs also want residential finance, and Thinktank, via its deep and trusted network of mortgage brokers and aggregators, is well-positioned to provide this as an adjacent product. By 2018, residential loans had steadily grown to comprise between 10% and 15% of the book.

However, COVID has seen that percentage of loans grow to about 50% today. Two factors have been at play. Commercial finance activity fell. A pandemic that was understandably shaking business confidence and shrinking the economy inevitably meant a slowing demand for commercial loans. Across the market, commercial lending activity initially fell by around 40-50%, and borrower hardship support grew.

But to the market’s surprise, and, to be honest, Thinktank’s initial surprise, residential lending quickly picked up, so much so that calls have emerged for regulatory intervention to take some heat out of the market where the higher risks are perceived. The fact the company funded more than $1 billion in loans in the 2021 financial year can be largely ascribed to a combined increase in residential and SMSF lending, more than compensating for the temporary decline in commercial lending.

Although the commercial property market generally has been recovering well since the initial shock of COVID-19 (retail remains a weak spot while some individual market segments such as industrial have remained solid throughout), it still lags demand for residential finance.

It was in this environment that Thinktank launched its first RMBS in August 2021, with the final ratings assigned by Standard and Poor’s and Fitch Ratings being AAA(sf) for the $400m Class A1 Notes and the $50 million Class A2 Notes, while the $16 million Class B Notes, the $9 million Class C Notes, the $6.5 million Class D Notes, the A$3.5 million Class E Notes and the A$2.5 million Class F Notes had ratings of AA(sf), A(sf), BBB(sf), BB(sf) and B(sf), respectively.

Pricing was fully disclosed with the Class A1 Notes set at a margin of 0.90% above the 30-Day Bank Bill Swap Rate. The margins above the 30-Day Bank Bill Swap Rate for the remaining Notes ranged from 1.05% for Class A2 to 6.3% for Class F. The bonds were placed with 21 institutional investors of which 83% were domestically based and 17% offshore. Real money investors represented 57% of the total amount issued while banks accounted for 43%.

Institutional support for the company’s first RMBS issue was strong, with the transaction launched at $400 million but growing to $500 million due to keen demand.

This reflects the ongoing strength and stable performance of the Australian securitisation market. The nature of losses seen overseas in the wake of the GFC simply didn’t happen in Australia. For Thinktank’s own part, investors have not experienced a single loss from its six CMBS transactions of more than $2 billion issued to date.

Thinktank is looking at two or three new securitisation transactions in 2022, potentially two residential and one commercial, each of which is expected to be larger in size than preceding transactions. Thinktank is confident of strong underlying and ongoing institutional demand for forthcoming issues, further enhancing its reputation in a still growing and important market that is a vital part of the supply of credit to Australian business and consumer borrowers which, in turn, offers product diversification and significantly adds to competition with the country’s major banks.

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