This article is from the Australian Property Journal archive
MORTGAGE broker AFG is tapping investors for $60 million to strengthen its capital position and support future growth and diversification, as it anticipates residential settlements to fall in the coming months.
The fully underwritten equity raising will be conducted at an offer price of $1.15 via a $45 million 1 for 5.5 pro rata accelerated non-renounceable entitlement offer and a $15 million institutional placement.
Certain AFG directors and management have committed to subscribe for $5 million of the equity raising and to sub underwrite up to $690,000 of the retail entitlement offer.
AFG expects residential settlements to fall in upcoming months, from April’s strong level of activity, due to a slowdown in broader economic activity, higher levels of unemployment and a potential decrease in house price and sale volumes caused by the COVID-19 pandemic.
Settlement volumes and upfront commission payments are tipped to soften in the coming months as a result.
AFG chief executive officer, David Bailey said AFG is taking action to reinforce its balance sheet to enable the company to navigate current market uncertainties from a position of strength, and remain well positioned for continued growth.
“Additional capital will also allow the company to continue to explore strategic opportunities to further diversify earnings. We expect the COVID-19 pandemic will change the way people do business in the short to medium term, if not permanently.
“Equity raised will assist AFG to ensure our brokers are at the forefront of technology to support their customers, make their workflows more efficient and accelerate the enhancement of our digital platform to drive competition in the lending market.”
AFG Securities’ existing loan book of $2.85 billion is likely to continue to deliver “strong” net interest income, although loan book growth is likely to slow over the next 12 months.
Earlier this month, the company reported 33% growth in lodgements during the March quarter compared to the same period last year. While the trend has continued into April, it said the settlement conversion ratio remains uncertain but is expected to be lower, with settlements subject to delays given the impact of operating in the COVID-19 environment.
“The increased activity in the March quarter and month of April was largely driven by record low interest rates, and more recently refinancing activity as brokers helped borrowers shore up their positions against the impacts of COVID-19 ahead of potential shutdowns,” it said.
Operating cash flow from existing trail commission arrangements on AFG’s $151.7 billion trail book originated by AFG mortgage brokers is expected to continue, and a majority of lenders have confirmed they will continue to honour trail commission payments on COVID-19 hardship cases for six months.
AFG recently extended AFG Securities’ key warehouse facilities with $546 million headroom available in the facilities, and is expecting an approximately 15 basis point increase in the cost of funding. AFG currently has a collective provision of approximately $1.2 million for losses, which is expected to increase for the FY2020 results.
AFG will have pro-forma unrestricted cash and cash equivalents of $112 million post completion of the equity raise.
All loans that have a loan to value ratio greater than 80% are covered by Lenders Mortgage Insurance. AFG Securities has not incurred any losses on non-LMI insured loans to date.
“The general consensus market outlook is for property price declines of between 5% and 15%. If this assumption holds, AFG does not expect losses to be material,” it said.
