US hedge fund in talks
But some positive news arrived last month when YBR disclosed a non-binding $18 million investment by an unnamed American hedge fund.
The potential capital injection could help secure a $300 million “warehouse” securitisation funding facility from a big bank – understood to be Westpac – to enable YBR to manufacture mortgages and sell them to investors.
If Bouris pulls off the deal, YBR’s future prospects look brighter.
“We’re going to go back to being a mortgage specialist and manufacturing our own mortgages,” Bouris told The Australian Financial Review. “It’s a critical piece of my whole strategy and always has been.
“This market needs another lender in the mortgage market place.”
Yet if Bouris fails to seal the securitisation funding deal with the US hedge fund, YBR could be under renewed financial pressure.
Poor financial performance
The firm’s track record to date has been underwhelming. In the first half of 2019, YBR lost $34.1 million. Its share price has fallen to below 7¢, down from 70¢ in 2014.
YBR’s market capitalisation is just $19 million, about a quarter of the $84 million it has raised from shareholders in multiple capital raisings since 2011.
“The share price does not reflect our true value,” Bouris says.
Nine has written down its $25 million or 19 per cent investment in YBR, made in 2011 and 2014 through a mix of cash and contra for free advertising the media company provided. (Nine is owner of The Australian Financial Review.) Macquarie Group, a strategic partner of YBR to sell mortgages, dumped its 20 per cent shareholding in April 2018 at only a fraction of the price it acquired the shares. Ellison lost money on the $3 million investment he made at 70¢ a share in 2013.
Corporate raider Ron Brierley applies pressure
Adding to the pressure, corporate raider Ron Brierley is breathing down the neck of Bouris. Brierley’s Mercantile Investment Company lobbed a 9¢ a share takeover offer last August and highlighted YBR’s “historically poor financial and share price performance”. Brierley has called for a strategic review of YBR.
Mercantile owns 19.9 per cent and is underwater on its investment after it bought Macquarie’s stake for about 14¢ a share last year.
Bouris has rejected the takeover offer.
Bouris family earns millions
Meanwhile, Bouris, his family members and their related entities have received from YBR more than $28 million in personal remuneration – cash and shares – and payments for services rendered since 2010, according to Financial Review analysis of YBR’s annual remuneration reports.
Bouris and his companies have received $23 million for services provided to YBR, including to entities controlled by Bouris for consulting, marketing, insurance, rent and accounting services.
Bouris says he has run the business to build a $55 billion mortgage book and has been YBR’s “main marketing asset”, including appearing unpaid for five years on 56 episodes of The Apprentice to build the YBR brand.
“So the company used me to do that and I directed all my talent fees as contra advertising to YBR,” Bouris says. “Also I was restricted under my YBR agreements from undertaking any new income streams under what is called a ‘lock in’ agreement.”
YBR’s accounts show Bouris’ Golden Wealth Holdings forgave almost $2 million in debt from YBR when he took over in 2010.
His brother and YBR board member Adrian Bouris has collected $3.1 million in payments since 2010. This includes entities connected to Adrian, Chifley Travel and BBB Capital, which has advised YBR on mergers and acquisitions.
YBR had made several takeovers, including paying $36 million for non-bank mortgage firm RESI Mortgage Corporation and $17.6 million for mortgage aggregator Vow Financial Holdings.
Mark Bouris says Adrian and the entity he is a director of was only paid for successful merger deals, instead of having to “spend the money with an investment bank and have had to pay whether a deal was completed or not”.
“It should be noted that any negotiations with Adrian are done by the independent directors and I always abstain,” he says.
Mark Bouris’ brother-in-law Richard Shaw is YBR’s chief financial officer and company secretary. He earned $338,283 last year and has earned $2.3 million since 2011. Bouris says Shaw’s remuneration is below average for a chief financial officer of a company of YBR’s size and it has been independently confirmed by remuneration expert John Egan.
ASIC monitors YBR accounts
Meanwhile, the corporate regulator has been monitoring YBR’s accounts and recently consulted with YBR on writing down the company’s goodwill.
On March 1, YBR shares entered a trading halt.
A week later YBR disclosed it had suffered a $34 million write-down on its wealth management and lending businesses and other intangible assets across the firm.
Bouris blamed challenging consumer and market conditions, the royal commission, tougher credit provision by banks and uncertainty on regulation of mortgage brokers.
“In all the years being involved in the home loan business, I have never seen such difficult borrowing conditions,” Bouris said at the time.
YBR shares resumed trading on March 8.
ASIC published a public statement on March 21, saying it noted YBR’s decision to write down goodwill and other intangible assets of its Lending Cash Generating Unit (Lending CGU).
“ASIC had raised concerns about the reasonableness and supportability of revenue growth forecasts used in testing the Lending CGU assets for impairment for Yellow Brick Road’s financial report for the year ended 30 June 2018 having regard to performance, market conditions and industry risks,” ASIC said.
This month in a strategy update to the market Bouris announced chief executive Frank Gannis would step down, after joining YBR from Macquarie in October last year. Gannis will become a part-time consultant to YBR.
As executive chairman, Bouris will oversee an overhaul of the YBR business model.
“I’m getting more heavily involved because it’s an area I have good expertise in manufacturing mortgage products and distribution of mortgages,” he says.
YBR has a network of 115 YBR-branded branches across the country, as well as more than 500 Vow Financial broker firms.
Together, the two brands have $29 million in net trailing broker commissions owing to them – cash flow that will be safe under the returned Morrison government’s mortgage broker rules.
YBR’s new strategy
When he set up YBR eight years ago, Bouris’ plan was to offer affordable, good quality financial advice to Australians on wealth, superannuation and mortgages.
Yet financial planning has proven to be a tough business, as underlined by the scandal-plagued big four banks retreating from the industry.
Most consumers are reluctant to pay relatively high fees to receive unconflicted advice on their financial affairs.
Bouris says the cost of compliance, regulation and educating financial planners has become too expensive for smaller players like YBR and the financial advice business has become a “scale game”.
YBR lost millions of dollars investing in its financial planning investments. YBR announced this month it would sell its wealth business. It is fielding interest from potential buyers.
It will be exactly like what we did at Wizard.
— Mark Bouris
“I didn’t succeed because the cost of supplying the advice now is quite high and there is a lot of compliance regulation, cost of educating financial planners and risk,” Bouris says.
Instead, Bouris will go back to his roots by focusing on selling home loans.
“In the mortgage business we do have scale,” he says. “It will turn us into a simpler and more profitable business.”
YBR currently sells mortgages on behalf of banks, including Macquarie, and makes money by receiving upfront and trailing commissions.
The mortgage aggregation business model operates on thin commission margins and YBR does not currently issue loans funded from its own balance sheet.
To boost its profits from home loans YBR has been trying to establish a “warehouse” securitisation facility to allow it to fund and sell its own mortgages.
The system would enable YBR to move beyond earning narrow commissions to more lucrative net interest margins on home loans.
To obtain the mooted $300 million in warehouse funding from a big bank – such as Westpac – for a securitisation facility, YBR requires a “first loss” capital buffer in case some of the home loan borrowers default.
A cash-strapped YBR doesn’t have the necessary capital itself, so is dependent on external equity funding.
The unnamed US hedge fund has offered a potential lifeline to inject $6 million for first loss capital. A further $12 million is being tentatively offered as working capital for YBR’s RESI wholesale business.
RESI does loan administration for banks, such as due diligence for approving credit, checking arrears, documentation and settling loans.
YBR said in a statement to the ASX this month that it was in the later stages of final due diligence, including negotiation and documentation in the complex process with multiple parties.
If the warehouse is established, the loans YBR issues would be aggregated in the facility and eventually securitised into residential mortgage-backed securities and sold to professional investors.
Back to the future
It would be a similar model successfully employed by Bouris when he took on the big four banks through his upstart Wizard Home Loans in the 1990s and early 2000s.
“It will be exactly like what we did at Wizard,” Bouris says. “It will be very profitable for us. It’s what I know and what I’m good at.”
Bouris sold Wizard to GE Money for a reported $500 million in 2004 – before the 2008 global financial crisis smashed the securitisation market after the US subprime home loan crisis tarred the industry globally.
Bouris has been waiting for the securitisation market to reopen for the past decade. He has foreshadowed to investors for several years that YBR would get into securitisation.
Securitisation markets are now wide open and cheap funding is plentiful, as yield-hungry global investors devour a shrinking pool of AAA-rated securities like Australian residential mortgage backed securities.
There are handsome profits margins on offer.
Non-bank lenders such as Pepper – owned by US private equity firm KKR – have seized on the cheap home loan funding.
“Until recently, the market for wholesale funding for securitisation was very expensive and didn’t work,” Bouris says. “So I’ve had to wait for that to settle down.”
Small business lending
Bouris says he will target lending to small business people, who often struggle to get credit from traditional banks.
“Nobody is lending to the self employed and that’s our lending product,” he says.
Bouris will also target investor loans, interest-only loans, self managed superannuation funds, foreign residents and mortgages with loan-to-valuation ratios above 80 per cent.
The small business focus explains why in recent months he has been spending many hours on social media building The Mentor brand for small business followers.
The re-election of the Morrison government – who Bouris supported through thousands of robocalls to voters during the campaign – and easing of lending restrictions by the banking regulator and an imminent interest rate cut by the Reserve Bank of Australia also bode well for YBR.
Bouris says Morrison’s election win is the “perfect scenario” for YBR.