INSTITUTE FOR FACTORS AND DISCOUNTERS

                   IN AUSTRALIA
                             JOHN BILLS
                           Executive Officer
 Institute for Factors and Discounters of Australia and New Zealand


The last ten years have witnessed the very strong expansion of factoring and
discounting in Australia. With total turnover now around A$40 billion a year, the
Industry has undergone a transformation over this period. Major domestic and
international competitors have entered the market; discounting has captured an
ever-increasing share of business and there has been an unparalleled increase in
the business sector’s awareness and acceptance of debtor finance. However, in
some respects there has been little or no change, with for example, non-recourse
arrangements continuing to be almost non-existent.

There are few signs to suggest that debtor finance will not continue to prosper in the
period ahead. The Australian economy has been strong and factoring and
discounting will continue to be one of the fastest growing segments of the financial
services sector.

Industry Environment

The Australian economy has experienced uninterrupted expansion since the early
1990s, and these favourable domestic conditions are now being supported by a
strong global economy. Commodity prices have increased substantially, which has
had a flow-on effect to Australia which is a large exporter of resources.

Consequently, Australia’s terms of trade have risen dramatically, up by some 30% in
the past three years. This is in contrast to most industrialised countries, which have
experienced falling terms of trade or only a modest increase.

As a consequence, there have been some emerging inflationary pressures and
supply constraints, prompting the Reserve Bank of Australia to increase official
interest rates by 0.25 basis points to 5.75%, on 3 May 2006. Prior to this increase,
Australia witnessed a period of significant stability in monetary policy, and since late
2003 the cash rate was adjusted on only one other occasion, an increase of 25 basis
points, to 5.5%, on 2 March 2005. While most countries over this period have been
undertaking a process of bringing interest rates back to more normal levels, this
process had largely been undertaken in Australia in 2002-2003. Official interest
rates are now 1.5 percentage points higher than their low of 4.25%, in December

Lately there has been a re-ordering of activity in the domestic economy. A decline in
housing construction and consumer spending has impacted on domestic demand,
and business investment has taken over as the driver of growth. Following earlier
substantial falls in the unemployment rate, in recent times it has stabilised at around
the 5% level.

Market Performance and Supply

The debtor finance market in Australia has expanded rapidly over the last ten years.
In 1995, total turnover for factoring and discounting was A$3 billion, and in 2005 it
reached $A37 billion. This growth has been more pronounced since 2000.

                                           Turnover A$Million
                      Factoring            Discounting        Total
1995                                 1,068             1,893                     2,961
2000                                 2,484             8,478                    10,962
2005                                 3,947            33,362                    37,309

In the December quarter 2005, for the first time quarterly turnover exceeded $A10
billion, equivalent to the total twelve months turnover in 2000.

Total turnover in 2005 of $A37.3 billion was 19% above 2004. The graph below
shows the grown in turnover since 1995.

                            ANNUAL TURNOVER $Billion
                                (Calendar Years)

                                  Discounting Factoring



                    $B 20




                             95   96   97   98   99   00   01   02   03   04   05

This very rapid growth in the last decade has seen a substantial increase in the
number of participants in the market. Australia has four major banks, and all now
operate a debtor finance division in their own right, whereas in the past these
operations were conducted by separate entities or were not offered. Most of the
regional banks now provide debtor finance, and have generally entered the market
by way of acquisition of existing operations. A number of international banks have
entered the market in the last couple of years.

Whereas a decade ago the market was dominated by non-bank participants
occupying niche markets, the provision of debtor finance is today much more broadly
based. In addition to the major regional and international banks, there are also a
number of international and local specialist debtor finance providers, who mainly
operate on a national basis, but there are a number which operate in limited
geographical locations.

The recent period has witnessed several new entrants, and some consolidation.
HSBC Bank and Capital Finance Invoice Discounting, part of the HBOS Group, have
both established debtor finance businesses, Bendigo Bank has acquired Oxford
Funding, and Bank of Queensland has acquired ORIX Factors.

The growth of debtor finance in Australia has seen a significant change in the
composition of the market, with discounting now making up a much larger proportion
than a decade earlier.
            1995 Annual Turnover                                             2005 Annual Turnover

                                                                     Factoring A$3.9 billion
    Factoring A$1.1 billion                                             11%


                              Discounting A$1.9 billion                                              89%
                                                                                      Discounting A$33.4 billion

In the space of ten years, discounting has grown from 64% to 90% of the market.
However, when viewed in isolation, the performance of factoring has not been
disappointing, as shown in the following graph. Annual volumes have increased
from $A1.1 billion in 1995 to $A3.9 billion in 2005; this is almost a fourfold increase
over the decade, a notable performance in itself.

                                               Factoring: Turnover (A$billion)








                               1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

However, it is the continued exceptional growth of discounting which has altered the
composition of business in Australia. Over the decade, discounting turnover has
increased from $A1.9 billion per annum, to $A33.4 billion, an eighteen-fold increase.
Part of the reason for the extraordinary growth of the discounting product is that
many of the providers that have entered the market in recent years have
concentrated on discounting, either offering this product exclusively or promoting it
as the predominant product.

                                Discounting: Turnover (A$billion)







                        1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Furthermore, the increasing awareness within the Australian market of debtor
finance has attracted the attention of larger companies of this form of funding. This
has two consequences, in that larger companies are more likely to utilise discounting
because they have the personnel in-house to perform the additional functions
provided by the factoring service, and secondly, the quantum of their invoices will be
greater than smaller companies.

                                Factoring & Discounting
                               Average Turnover per Client



                  2.0                                       1995

                                 Discounting                   Factoring

In the Australian market, factoring and discounting are very different risk
propositions, reflecting the greater control the factor has over the debtor security.
Discounting is generally more suitable to larger business with appropriate systems
and a proven track record, whereas factoring may be more suitable to clients where
the factor has a much greater involvement in managing its debtor security.

    State Turnover
    June Quarter 2005
    Percentage of total turnover       WA
                                       9%                      NSW&ACT
                              SA&NT                              31%



                                   Table (Quarterly Trends)


                                                Dec     Mar     Jun     Sep     Dec
                    Factoring                 Quarter Quarter Quarter Quarter Quarter Latest 12
                                               2004    2005    2005    2005    2005    Months
Turnover ($M)                                  998.3   873.2   966.2  1032.6 1075.1 3947.1
Receivables (end of qtr -$M)                   510.4   488.7   469.2   495.8   559.9
Number of Clients (end of qtr)                 1,700   1,715   1,726   1,743   1,746
Number of Debtors (end of qtr)                207,033 211,996 210,442 207,386 210,929

                                                Dec     Mar     Jun     Sep     Dec
                  Discounting                 Quarter Quarter Quarter Quarter Quarter Latest 12
                                               2004    2005    2005    2005    2005    Months
Turnover ($M)                                 8120.1 6945.8 7955.8 8691.4 9769.0 33362.0
Receivables (end of qtr-$M)                   3825.3 3442.0 3495.7 4027.7 4429.5
Number of Clients (end of qtr)                 2,421   2,445   2,517   2,613   2,756

                                                Dec     Mar     Jun     Sep     Dec
                      Total                   Quarter Quarter Quarter Quarter Quarter Latest 12
                                               2004    2005    2005    2005    2005    Months
Turnover ($M)                                 9118.4 7819.0 8922.0 9724.0 10844.1 37309.2
Receivables (end of qtr-$M)                   4335.7 3930.7 3964.9 4523.5 4989.4
Number of Clients (end of qtr)                 4,121   4,160   4,243   4,356   4,502

Competition in the debtor finance market is strong, with many clients utilising brokers
to find the best deals, whilst clients not utilising brokers will typically shop around to
obtain the best pricing and structure for their needs. As a result, the sector competes
on both a pricing and risk basis.

Trade terms in Australia are generally 30 days from the end of the month in which
the goods and/or services are delivered. On average, debt turn is around 43 days,
and varying between industries from the mid-30s to slightly above 50 days. SME tax
obligations are generally on a quarterly basis, and as a result debt turns on tax
remittance months are often longer.

Future Trends

The Institute for Factors and Discounters of Australia and New Zealand (IFD) was
formed in 1994, and an important part of its charter is to increase the awareness of
debtor finance and to enhance the standing of the Industry. As part of this, in 2005
IFD established a Factoring and Discounting Training Program, which is the first
education facility specifically meeting the needs of the debtor finance industry in
Australia. The course content was written by industry participants and tailored to
local market practices. In its inaugural year, the training program has proved to be
most successful, and as part of the program, a ‘Student of the Year’ presentation will
be a regular event.

A number of regulatory developments are on the horizon, primarily anti-money
laundering legislation and a proposal to establish a personal property securities
(PPS) regime. IFD is working closely with Government on these reforms, and has
the benefit of learning from the introduction of a PPS regime in New Zealand. The
anti-money laundering reforms will begin to operate in the period ahead, whereas the
PPS proposal will develop over the medium-term.

The debtor finance business shows every sign of continuing the strong performance
of recent years. It is anticipated that the number of participants in the market will not
expand at nearly the same pace as over the recent period, and the market now
appears to have entered a period of consolidation.

It is also anticipated that discounting will continue to grow at a faster rate than
factoring, further increasing its dominance. At the same time, a number or
companies will continue to focus on the provision of full service factoring. In the
same vein non-disclosed facilities will dominate, whereas non-recourse facilities will
continue to be very small segments of the market.

                                      ***   ***   ***

                            Turnover (A$million)
    Table 1
               Factoring         Discounting         Total
     1995        1068                1893             2961
     1996        1195                2713             3908
     1997        1331                3850             5180
     1998        1632                5015             6647
     1999        2157                5995             8152
     2000        2484                8478            10962
     2001        2684               10830            13513
     2002        2888               14803            17691
     2003        3419               19739            23158
     2004        3710               27709            31419
     2005        3947               33362            37309

                             Number of Clients
    Table 2
               Factoring         Discounting         Total
     1995        1219                539             1758
     1996        1289                708             1997
     1997        1403                940             2343
     1998        1692               1177             2869
     1999        1886               1327             3213
     2000        1985               1533             3518
     2001        1964               1747             3711
     2002        1247               1654             2901
     2003        1545               1975             3520
     2004        1700               2421             4121
     2005        1746               2756             4502

                           Receivables (A$million)
    Table 3
               Factoring         Discounting         Total
     1995         149                333              482
     1996         171                445              615
     1997         175                616              792
     1998         246                762             1008
     1999         312                919             1231
     2000         384               1320             1703
     2001         383               1637             2020
     2002         439               2180             2619
     2003         481               2723             3204
     2004         510               3825             4335
     2005         560               4429             4989

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