Bluestone boss Alistair Jeffery was able to sidestep disaster by responding quickly and astutely to the advent of the credit crisis, writes Jane Searle.
Unlike Alistair Jeffery, few non-conforming lenders would describe the global credit crisis as "a fun and rich experience".
As the founder of Bluestone Group, Jeffery has watched the world turn against his business model as its key funding source froze, competitors failed and investors shirked risk.
In America, subprime lenders were a trigger of the crisis when they lent to mortgagees with little ability to repay. When these borrowers defaulted, institutions wore heavy losses or collapsed from exposure to the debt, which has been sold-on.
Bluestone issued a small amount of subprime loans, though most of its lending was to "non-conforming" clients who lacked the credit history of prime borrowers.
Reflecting on the crisis from his London base, Jeffery says: "I've had more fun and a far richer experience than any other time. But the pain from this crisis has been greater than past downturns, so its lessons will be remembered for longer."
Two years after the crisis, Bluestone has transformed its business model, is booking higher profits than in its best days as a lender, and counts Macquarie Group among new investors.
This has not been without hurdles. The Bluestone founder admits to moments when he considered shutting shop and recalls markets unravelling during his travels to the United States and Europe in 2006 and 2007.
"Subprime lenders had started to fail and we were changing our credit criteria and cutting loan sizes," he says. "But in July 2007 debt markets closed and the pressure was felt more widely."
As the crisis deepened, Bluestone rushed to complete two large securitisations, the repackaging and selling of loans that was its key funding source. It slashed costs and staff and raised $20 million from private investors, including funds from Crescent Capital Partners and Cambridge Place.
In early 2008, a warehouse funder clamped down on a $500 million credit line. Jeffery saw this as an aversion to the non-conforming lender model, which risked being starved of funding.
In the 1990's, he had worked with a senior banker at Goldman Sachs and Nomura on deals involving exotic assets - the purchase of pubs, non-conforming loan portfolios, aircraft leases and forestry contracts.
Drawing on these skills, management decided Bluestone could reorientate. It would recover payment on acquired loan portfolios of failed firms, service arrears and provide funding to aid stressed companies.
Jeffery recognised the need to partner for capital and paired with $7 billion US-based hedge fund Varde. In the lead-up to Lehman Brothers' collapsed, the pair began to bid on loan portfolios and made their first purchase in August 2008 - the $150 million auto receivables book of a failed New Zealand company.
"That kicked off our relationship and confirmed the new model was going to work," Jeffery says.
The Bluestone founder moved his family from Sydney to the United Kingdom. The firm acquired more loan books and clients, posting 56 per cent lift in net profit to $6.1 million for the first full year under its new model in fiscal 2009.
Jeffery was already friends with Macquarie Group's head of debt structuring and origination, Alan Cameron. The bank had been eyeing Bluestone's business model and liked its debt acquisition and servicing activities against the opportunistic backdrop in Europe.
Cameron made a trip to the UK in late 2009. "We talked about the potential for Macquarie to take an equity interest in the business - they were also looking at pushing aggressively into the sector and [into] Europe," Jeffery says.
A deal was thrashed out earlier this year, with Bluestone renewing its near-term debt to appease Macquarie. Real estate fund Forum Capital Partners contributed $20 million and Bank of Scotland pitched in $28 million.
Macquarie will help arrange senior tranches of funding, while Bluestone will raise the junior, riskier trenches from hedge funds and other investors.
Throughout Bluestone's successful transformation, it has maintained its mortgage portfolio - run down to $1.5 billion - and all it's loan-servicing infrastructure. A slew of regulation has dissuaded players such as the former RAMS Home Loans from re-entering the mortgage market, yet Jeffery sniffs opportunity.
Bluestone has always had its own responsible-lending charter and he maintains regulation would not require drastic change to the business. "The market has returned to the 1990s when big banks control prices, margins have widened credit criteria have tightened," he says.
"Other lenders have been so annihilated it means the opportunity is as large for us as it was when we started."
Securitisation pricing is still uncompetitive but Jeffery believes that funding will improve in the coming six to 12 months.
He attributes Bluestone's survival to four key reasons. "We operated profitably through the period to retain the confidence of suppliers and stakeholders; [secondly] we had early funding support [from investors such as Melbourne's Liberman family] and wouldn't have survived if we were a private venture."
Thirdly, Bluestone's accurate credit modelling means just 1 per cent of its loan book has been [lost] since it established in 2000. Lastly, its organisational structure enabled it to scale back quickly during the crisis while retaining key infrastructure.