Computershare Limited (CPU) Earnings Call Transcript & Summary

Welcome, everybody, to the Computershare investor update. [Operator Instructions] Thank you again for joining us today. I hand it over to our first speaker, Stuart Irving, CEO and President. Please go ahead.

Good morning, everyone, and thank you for joining the call today. Nick Oldfield, our CFO, and Michael Brown from Investor Relations are here as well. Now we last spoke to you on March 11, and whilst that seems like a long time ago now, as you'll be aware, since then, interest rates have changed again, and market conditions have regressed. On this call, I'll take you through these recent changes and explain how they impact our trading performance and earnings guidance. I'll also provide updates across our major business lines and what we are seeing through this fluid landscape. Now we have released a new presentation pack to the ASX, which I will refer to during this presentation. So moving to Slide 2. Before you start, you might ask why haven't we just withdrawn guidance like everyone else. The macro environment has clearly become more volatile. Well, it's long-held view that we should do all we can to assist investors particularly in those difficult times. And whilst predicting transactional revenues has become more challenging, around 80% of Computershare's revenues are recurring, and we do feel we have a good line of sight on the numbers through to the year-end. Now moving to Page 3 and before I get to the business updates, just a few general updates on how we as an organization have been responding to COVID-19. As a global business, we've been dealing with this since February. Our China business has been down since then and moved to a work-from-home regime. And due to our role in financial markets, we are deemed a critical service provider, and we have over 80% of our staff working from home. Fortunately, prior investments in workflow and work planning tools allow us to determine and also track productivity levels, and all systems and sites are operational. Now there have been occasional [indiscernible] fires to put that out, but we are managing through this to provide certainty to our clients. I'll now move on to Page 4 and address the guidance change. Our FY '20 management EPS is now expected to be down around 20%. And you will remember, we previously said that we would be down around 15%. Now the recurring revenue, core industrial Computershare that we talk about, is performing resiliently, but it's not entirely immune to what is happening out there, but the underlying fundamentals have not changed. Interest rates have changed, though. The U.S. Federal Reserve, Bank of England and Bank of Canada have undertaken further rate cuts earlier than expected. These changes are strong responses to support economies through the virus outbreak, but they happened earlier than we anticipated. Coupled with the U.S. government's moratorium on mortgage foreclosures and equity market volatility impacting some transactional revenues and employee share plans, we are seeing some additional pressure on our earnings. We do see opportunities in our countercyclical businesses especially in Bankruptcy Administration and also in equity capital raising, which we'll discuss further in the deck. Now turning to our margin income in more detail, I'll now move to Slide 5. These latest rate cuts have pushed the forward curves down further. Now our methodology for forecasting margin income revenue is to apply the rate changes that have happened to the forward curves as they stand today. And the other variable in forecasting margin income revenue is average balances. We now assume average client balances will be around $13 billion to $14 billion for the fourth quarter of this year and the average in FY '21 to be around $14 billion to $15 billion. Now we have assumed and have seen an initial corona shock on slower M&A activity and some client dividend cancellations. Balances are then expected to rise modestly through FY '21 as mortgage services in the U.S. continues to grow and our Class Actions and bankruptcies businesses enjoy heightened levels of activity. Now FY '20 margin income revenue is expected to be around $180 million. Previously, we thought it would be around $185 million before. And in FY '21, margin income revenue is now expected to be around $100 million, and that's down by $15 million. And you can see these stats represented in chart form on that page. I'll now give an update on key business lines and turn to Slide 6. Let's start with Issuer Services, our largest business. Register Maintenance has a strong fixed fee component of between 60% to 70% of revenues, and they're largely unaffected. We also earn fees for services provided directly to shareholders. Now U.S. shareholder paid activity is down in March due to reduced trading levels and, as a result, sales commissions. And what we saw is that through early March, levels held up but then dropped off in the last 2 weeks of March. Now we're not seeing any evidence yet that dividend reinvestment take-up is changing, but it is possible given the decline in share prices. As for dividends, we have seen 84 clients globally suspending dividends to date. Now we facilitate over 20,000 dividends a year, so the impact of dividend payments currently remains less than 1%. In Meeting Services, we helped companies with their annual general meeting, and it's an important revenue stream for us. Now with the restrictions on public gatherings, these meetings are now switching to virtual, and we can provide that capability for our clients. Now we are executing on the majority of our clients' AGMs. Now we have over 6,000 our -- in our pipeline, and we've only seen less than 200 postponed or canceled. We do expect, however, the deferral of revenue for some of these postponements of around $2 million to $3 million with this revenue now pushed into FY '21. Now moving to Slide 7. Still Issuer Services but really Corporate Actions, and Corporate Actions has 2 sides to it. Now in the short term, it has been impacted by subdued M&A activity, as you could imagine. At the beginning of March, we were actively engaged in over 260 corporate action events globally. And as time progressed, only 21 of these events had canceled to date. And for those that did cancel, we were still able to recover part of the fees. But as you can see, there is a good opportunity in capital raisings. Back in 2009, we had a bumper year in Corporate Actions, and you can see that on the chart. Companies launched rights issues to repair the balance sheets post-GFC. And whilst balance sheets are no doubt in better shape, we have seen some clients come to the market already to raise capital to weather the COVID-19 storm. And we expect more in the coming weeks. Now in Stakeholder Relationships, I have called out and we had line of sight in a large mutual fund proxy solicitation job, and that work is still underway and on track to mail next week. And finally, the Corporate Creations, the acquisition we closed last month. Net revenues were up 10% for March compared to last year, and filings are up 20% for this March versus the pcp as well. So we expect Corporate Creations and the Registered Agent business in general to be a stable, steady growth business. So Registry continues to be a resilient business as we provide critical services for corporates during this difficult time. In fact, even during March, we won a number of clients across both registry and entity management. And I know that I speak with a number of my peers and CEOs recently, a number of clients have remarked to me that now is the time they're glad to be with Computershare, with our robust balance sheet as well as our business continuity plans, which allow us to continue to service and communicate with their shareholders in their time of need. Now on to Employee Share Plans, Slide 8. Now Plans was performing well up to February and demonstrating structural growth and the benefits of the combination of Equatex into Computershare. This is clearly evidenced by the February year-on-year outcome with both client -- higher client paid fees as well as higher transactional fees. Going forward, again, is the case of 2 different revenue streams. The contracted issuer pace fees continue to recur, and they are not impacted. However, the selloff in equity markets is impacting the transactional revenues. Now these are dealing fees employees pay when they exercise units or options. The fees, like brokerage fees, are sensitive to equity market levels. Now the structural growth story in this business is intact, and we are expecting to see an increase in issuance by employers to offset recent value declines. Now we call this the equitization of remuneration, and it's good to see that it's continuing. And looking at some of our regions, we have seen issuance of stock units in the month of March against the same period last year to be, at times, up close to 40%. Now looking at slide now -- Slide 9, I'll give you an update on our U.S. Mortgage Services and also to provide some color on our U.K. business. Now firstly, we've had a lot of investor questions about refi activity. In a normal environment, if the Fed cuts rates, then normally, mortgage rates track lower and refi activity increases. Now mortgage rates dropped initially as the pandemic began, but spreads have widened since to reflect the economic uncertainty. Refinance activity has slowed over the second half of March and should slow further as shelter in place widens. Secondly, strip sales. Now our ability to complete excess strip sales in this market is intact. It's a large and liquid market over there. And we expect to invest around $25 million in mortgage servicing rights in the [ second half ]. Now that's well down on the $140 million that we spent in the first half. As we said, the next stage of our growth in this business, will be less capital intensive. The third point to cover is the impact of forbearance or mortgage holidays. You'll have seen the U.S. government has put in place payment holidays for mortgages. The payments roll up to the principal and will be repaid at a later date. The government has also imposed restrictions on foreclosures. Now the mortgage payment holidays don't impact our servicing revenues. However, the stops on foreclosures will temporarily impact us. This is a factor in revising guidance, as I talked about. Now on to Slide 10. Let me talk about the issue of advances and the risk of rising delinquencies. Now to recap, an advance is where a mortgage servicer puts up capital for the bondholders to cover 120 days of mortgage payments should the mortgagee default. Now at Computershare, our advance funding risk is really focused on our performing Freddie Mac and Fannie Mae MSR portfolio. If the performing loans that we service for Fannie Mae and Freddie Mac go into default, we are liable for the first 120 days payments. Now let me take you through a simple sensitivity analysis to quantify this risk. For every 5% of total Fannie and Freddie borrowers that don't pay their loans, our advance liability would be approximately $28 million. Now to put this into perspective, Freddie and Fannie loans are strong credits. In the depths of the GFC, when house prices were promising, the default rate on these books was only around 5%. And you can see that on the chart on this page. And whilst we anticipate increased nonperforming loans, we have strong bank support for this type of advance. And remember, this also converts into additional fees for modification further down the track. And we've already had a number of inbound requests about our capacity to take on delinquent sub-servicing. So if we do see a rise in nonperforming, we are very well placed. Funding is in place for our own advances. And the skills, systems and capabilities are in place to increase sub-servicing of these types of loans. And finally, moving quickly to the U.K. 2 points to share. One, the planned migration of the third-party loans to our system in May is still on track from our perspective. We will get the cost synergies we planned for. And secondly, we have been working with the U.K. government to facilitate its own mortgage holiday. Again, like the U.S., it does not significantly impact our revenues, although it does slow down amortization on the book. Now moving to Slide 11 in Business Services. You will find the most countercyclical business we have in Computershare, which is bankruptcies, and that is beginning to ramp up. Now this is U.S. Chapter 11, Bankruptcy Administration. Now the global pause in business that's pushing companies to the brink of failure hasn't yet caused the spike in bankruptcies, but I suspect it will. And whilst filings in February and March may be lower than last year, you can see what is happening. The bankruptcy advisers are extremely busy. And they are getting with the lawyers to prepare for court filings, and we're at the end of that chain, helping with some of the prefile work but waiting on the actual filing. Now we currently have a dozen Bankruptcy Admin cases won but not filed, and 6 of these were won in the past 2 weeks, and you compare that to last calendar year where KCC filed only 24 cases for the whole year. And whilst it's not a business I have spoken about much over the last few years, I am grateful for its improving contribution in these challenging times. Now on to Slide 12. A few things on the balance sheet. As of 31st of March, net debt to EBITDA was at 2.2x. Since the half year, we made the Corporate Creations acquisition and also paid the interim dividend, but we expect this number to drop to around 2.15x by the year-end. We also provide some information on funding costs and the benefit we should obtain through FY '21. And I will say that FY '20, that number will be fairly modest. And finally, just some information on the debt maturity profile. We have started to work on the $450 million tranche due in a year's time, and we will look at options to blend and extend. That work is underway. We have a syndicate of top-rated banks in that facility, and we expect strong support. And finally, on to Slide 13. Computershare has worked hard to build the quality business with high recurring revenues, and you can see that progress very clearly with this slide. Stripping out margin income and FX, you can see that we are a resilient organization. Now we're not immune to the unprecedented business slowdown, but our free cash flow, nondiscretionary services, strong client base and opportunity for the optionality in Computershare to convert into profitability. But now in the interest of time, I'll close off here, and we can go to questions.

[Operator Instructions] Your first question comes from Kieren Chidgey from UBS.

Just a couple of questions, if I can. Maybe starting on U.S. Mortgage Services, the moratorium around foreclosures. So can you just give us any sort of feeling to how long sort of you expect that might carry on? And also, I think that gets included within the ancillary part of your U.S. Mortgage Services revenue, which is normally about 30%. Can you just talk to how material within that 30% foreclosure revenues actually are?

So you're right, that is in the ancillary revenues. I don't have a strong view on how long this will go for. I expect a little bit like forbearance in the U.S. that may well go on for about 12 months. But again, it's a little bit difficult to say. And in terms of quantum, I don't think we've kind of disclosed that. I mean we had a very strong first half in that area. As I remember, we spoke about at the half year because of the recovery part of the foreclosures and with house prices jumping up in the first half of our financial year. But look, it's a good $0.01 or $0.02 EPS, put it that way. Yes.

Okay. Is it fair to say it's at least half that ancillary revenue?

I'm trying to remember the exact number on that ancillary revenue.

We don't anticipate it will be as material as that.

All right. And I mean on the Bankruptcy Administration business and also around sort of the Corporate Actions, can you just talk to sort of the EBITDA margins around sort of incremental secondary capital raises or Bankruptcy Admin, presumably, they're much higher-margin sources of revenue, if we do see a lift in those areas?

Yes. So I mean Corporate Actions are slightly higher margin than normal sort of share registration. And I also think that there's a balance to be made with the clients in terms of how much you can actually charge. I mean one of the challenges is we're still not operating under a normal environment with individuals having to work from home, being able to keep a lot of our sort of communication sites up and ready and available and the premium for making sure that your job is the one that gets out and out through the door. But it tends to be higher-margin work from a Corporate Actions perspective, and that's always been the case. Over on the bankruptcy side, look, a lot of it really depends on how the company emerges from bankruptcy and the method and how often they actually communicate with the creditors and -- et cetera. But it's probably not as high-margin work as Corporate Actions. But I think we've said before, we have seen that business to -- it was 10% of Computershare's EBITDA at one stage back in the day but not as high margins as Corporate Actions.

Okay. And just final question on your debt. Can you talk about sort of what covenants you have from a net debt-to-EBITDA perspective and how much headroom there is?

We've got a plenty of headroom. I think what we've actually said is sort of net debt to EBITDA, we've got this sort of range that we sort of go in between 1.75 and 2.25. That's kind of the neutral zone. In our history, we've been up as high as 2.9 back in around about 2010\'11 as we did some large acquisitions. We're forecasting that by the time we get to June, we'll be at around about -- we'll come down from where we are today to approximately 2.15x, so plenty of headroom there as far as covenants are concerned.

Okay. I'm just thinking more of sort of FY '21 as we start moving through and annualizing a weaker sort of trailing 12 months.

Yes. Look, we've done the analysis on that, and we've got the headroom, yes, not just for -- you're right, not just for the 30th of June, but we have done analysis through '21, and I don't have any concern on banking covenants.

Your next question comes from Simon Fitzgerald from Evans & Partners.

, You did provide some helpful analysis just on the 5% rise on the Freddie Mae, Fannie Mac (sic) [ Freddie Mac, Fannie Mae ] delinquencies and what that would mean in terms of those advances. Just noting at the first half, you had $100 million of those advances on balance sheet. I'm just trying to get a bit of a sense in terms of where that might have gone post balance date and what would be, say, the total liability if those performing loans all had to go for 120 days. Maybe if you can help us there.

I'll pass that one to Nick.

Yes. Okay. Well, the first answer -- to address the first point, the situation at the end of December. Usually, December is a little bit of a seasonal peak in our advancing because we [indiscernible] all the tax payments due for across the range of states in the U.S. So if you look at the position in -- at the beginning early March, that -- the net advancing figure was around $60 million -- just over $60 million. So we've actually seen a pretty good improvement on the amount of capital invested in advances between 31 December and early March. As of today, we haven't seen any material movement in that, but the first remittance date for the next round of mortgages or the first remittance to Freddie Mac, Fannie Mae bondholders is 15th of April. So that's the date that we're working towards. And at that point, we would expect to see a spike in advances. Now earlier, Stuart talked about $28 million being the impact of 5% delinquency rate. Now what that $28 million is, is that is a cumulate and an accumulation of 120 days or 4 months' worth of advance payments to bondholders at a 5% delinquency rate. So if 5% of our borrowers do not pay in April, our advances will spike up $7.5 million or $7 million. And then 1 month later, it would be an extra $7 million. And 1 month later, it would be extra $7 million. So if you think about the -- if you're thinking around a 5% delinquency rate, that $28 million would not be hit until August. Hopefully, that answers your question.

Okay. That's helpful. Also, just wanted to get a sense -- I've just got 2 more questions, but just get a sense in terms of pricing of MSRs at the moment. But also, is there any sort of valuation -- balance sheet valuation considerations we should be thinking of?

Well, MSR valuations at the moment -- or MSR pricing, should we say, at the moment in the market are materially lower than they have been partly because there's a reduction in the amount of liquidity. So as we've said numerous times in the past, often pricing for MSRs is a function of supply and demand. And the reality is that, at the moment, there's not much demand in the market. A number of REITs and investors who have been buying new issue MSRs have got a range of liquidity problems, and so they're not buying. So there's a shortage of buyers in the market, and so pricing has dropped as a result. In terms of our market valuations, we continue to value our portfolio on a monthly basis. We tested -- we test our book value relative to the market value and we look at our -- the remaining -- residual life in that portfolio. We have seen fair market values drop over the course of the half so far simply because mortgage rates have dropped. But equally, rates have been pretty volatile, so the valuations have bounced up and down on a regular basis so far. So at this point in time, we're not anticipating any changes to our carrying value. We are -- we continue to review our -- the amortization period of the remaining residual life in the portfolio on a regular basis. And we'll continue to do that over the course of this half, but we're not in a position to think that we've got any issues at this point.

Okay. And just one final question on the bankruptcy in Class Actions. From memory, Stuart, I think the previous peak was 2010, which was 2 years after the GFC first hit. So we could potentially see this business sort of build over the next 2 years as they sort of start to unfold. Would that be a fair sort of assessment?

I think that would be a very fair assessment, Simon, because there's a whole heap of unusual circumstances at the moment. Now from my anecdotal conversations with the restructuring firms and some of the legal firms that are also involved with that as well as the sort of restructuring consultants, there's a number of delays at the moment. First of all, not a lot of courts are open to rubber stamp a whole bunch of stuff, right? A lot of the retailers are sort of holding off because they get put in a pretty time-compressed situation to go Chapter 11 as far as the rent is concerned, and they're kind of waiting for a little bit of relief from some of the government packages, yes? And then the other thing is there's been delays. And when a company goes in, there has to -- to Chapter 11, it normally arranges what they call debtor-in-possession financing, right? So that's something to keep the business ticking over, and it's normally backed against something that's pretty -- like a fairly liquid asset of the business. And of course in this environment that we find ourselves just now, there's not a lot of assets that you'd classify as liquid, right, for these businesses and where they would sell -- how would you sell a hotel? Is it a going concern when they've got no guests, for example? So the view is that there is going to be a delay. We'll start seeing more filings through April. We'll see retails coming on July, but it's really going to be, as you point out, something that should fire for the next 2 years. It's not just a sort of 1-year thing.

Your next question comes from Andrei Stadnik from Morgan and Stanley (sic) [ Morgan Stanley ].

I wanted to ask 2 questions if I can. The first one about rate income. Can you talk a little bit about some of the potential changes in hedging because the reduction to guidance for FY '21 income seems much better than expected in the light of the rate cuts globally in the last few weeks? Kind of second part of that question, should we -- if rates stay at the current level, should we be expecting a further material step down in FY '22?

So I think there's a range of our businesses where we can actually term out a considerable period of time. And that probably talks to some of the disparity between what people think FY '21 would be and then moving into FY '22. An example of that would be if you look at something such as the DPS contract, which is the Deposit Protection Scheme, 50% of the deposits can be put on terms from basically 1 year -- 1 to 5 years, yes? So we're allowed to do that in terms of from a term perspective. So we can put -- in some of our businesses, we can put a fair amount of duration in there. So that's what helps smooth it out. But we've always said that we wouldn't be able to defy gravity forever. If rates stayed where they were, you would see a natural step down also in FY '22, yes? But we haven't quantified that for you yet.

And on the second question, you've commented a lot about mortgage service in the U.S. But you also have substantial business over in U.K. So can you comment a little bit about refinancing activities seen in the U.K.? And also, any impact there from foreclosures potentially being put on hold in the U.K. as well? And overall, are you thinking that once the NPLs pick up, is that a revenue opportunity?

So just in terms of the U.K. So the U.K. have offered a 3-month mortgage holiday. And -- but basically, what happens with that is we defer payments for 3 months. We mark the account to make sure that it's not marked as payments not being received and make sure that no reports, et cetera, are sent out to credit agencies and a whole bunch of stuff like that, right? And then what happens is the amount then just gets added to -- there's not even an extension to the term, it just gets -- an amount gets added on to it. That's really what that is. We've seen sort of considerable inbound, especially on the UKAR book, for people requesting that mortgage holiday. It doesn't particularly change the fee structure. The U.K. mortgage market has changed quite considerably over the last couple of weeks from an origination perspective. As things were rather sort of volatile, you saw a lot of banks and financial institutions probably withdraw about somewhere between 70% and 80% of the mortgage product that we had on the market. They just withdrew them. So from an origination perspective, the government has pretty much said, "Don't move house, don't do this, et cetera." So that will have an impact on some of the new origination coming in. On the flip side though, it really slows down some of the amort on the book because people are not paying as much and they're deferring, et cetera, et cetera. And we're still collecting fees at sort of x number of basis points on the unpaid principal. So look, I think the U.K. market is a little bit in disarray at the moment as far as new origination is concerned. And I think it's going to take a little bit of time to settle down and get an appropriate view about where it's actually going.

[Operator Instructions] Your next question comes from Matt Dunger from Bank of America.

If I could just ask a question on the costs. You talked about the dedicated COVID-19 response team. You've also got the structural cost-out program underway. How is your cost base and also the structural cost-out impacted at the moment?

Yes. So what we're doing, Matt, is -- these cost-out programs need to obviously continue. And I think that they will not be terribly interrupted by what's happening within our business line. But at the same time, I got to look at some of my other underlying costs in Computershare and what this impact would be. And it has been quite unusual looking at the different components of Computershare's business. If I look at -- on the share registry side, I look for the first week of March, and I saw the inbound volume, whether that's inbound on the call, whether it's through our app, sort of the web or -- et cetera, et cetera, probably dropped around about of almost 5% a week, yes? So by the time I got to the first week of April, I actually saw inbound number of volume into that business. Just in generally, from shareholders and interactions dropping around about 20%. Happily that coincided when the rather abrupt ending of our ability to service our clients out of the Philippines, yes? So as our team members there couldn't get into the office and we lost that capacity, the volume capacity also dropped down. On the flip side, in our Mortgage Service business, our inbound calls went up 300% as we dealt with the moratorium -- or the mortgage holidays, et cetera, et cetera. So we have been trying to manage that through the group and then also look at the cost basis about what we can actually take off. And we're working through that now with all the teams to say, "Okay, what's going to be the new volumes? Is there any particular resource or area within the group depending on how long this lasts for that we're not going to need these services. How can we pull out resources quicker, et cetera, et cetera." So we're all on top of that, and we're looking at additional programs to take additional cost out over the period of time. And one of the unusual parts about Computershare business is the biggest impact that we've had is obviously on interest rates. It's like the silent killer. That -- and interest rate doesn't change the number of interactions with shareholders, how we have to send things out, our employees or with mortgages, et cetera. So even though that's had quite a significant impact into our business and why we went out ultimately and why we've had to re-guide again, it's really kind of business-as-usual elsewhere around the group with a little down here, up here, et cetera. But we are having an extra look at costs and looking at opportunities for certain functions within Computershare that we just wouldn't need for a period of time as the world recovers from what we're going through at the moment.

Great. And you just noted the lower rate environment, which is obviously impacting your revenues. On Slide 14, you've talked to shifting the pricing model. How quickly can you do that? And have you had any successes to date?

Yes. So there's 2 lots of balances. You've got your exposed and sort of the nonexposed. And in the nonexposed, it's kind of an agreement-by-agreement case, we might earn 15 basis points on something and et cetera, and that's a great spread there, et cetera. Now if we haven't got the ability to actually earn on that, we've got -- it's going to be far easier to tackle the nonexposed side than it would be on the exposed side, yes? I don't think that I'll be able to make up the gap by adjusting fee models, et cetera, et cetera. But we'll be able to make up some of it, and that's what we're turning our minds to now.

Great. And if I could just ask a last question on -- how will you look at this period as an opportunity for acquisitions? You talked about going up to 2.9x net debt to EBITDA in 2011. Would you consider doing that again?

Yes. Look, I think that we could. I think, just as an organization, we've been working hard just to do all the right things. We've sort of benchmarked about where we are just now. What we think the new world is going to look like? How will that roll forward into the following years? What we think that's going to do in terms of our debt? Roll that forward into '21, where we're at with covenants? Where we're at with ratings agencies? And then we've got to make some determinations about what we're actually going to be spending that money on. Clearly, MSRs are a lot cheaper now. So that's going to be less expensive. We still generate a lot of free cash flow in Computershare. So we do have that self-repairing balance sheet, which is very helpful in times like this. A lot of the assets that -- like I cover are not public assets anyway. So -- but there may well be an opportunity to try to attempt to acquire them. I mean, our goal is to be able to come out of this period as being able to successfully service our clients under very, very difficult circumstances on a global basis, to being able to be there and support them, to being able to stand by our employees and do the right thing through our employees, help the community, but also to come out of it stronger as an organization. So we are thinking about organizations that perhaps are in a less fortunate situation that we might be able to take advantage of in the nicest possible way.

The next question comes from Nigel Pittaway from Citi.

Just first of all, if I could just follow up on one of the earlier questions. I presume in terms of the foreclosure moratorium, in the guidance you have presumed that goes through to at least June because I think the official moratorium is only till April at this juncture. Is that correct?

Yes, we've assumed go through to June, Nigel.

Yes. Okay. Secondly, I mean, obviously, you've given sensitivities and sort of compared the -- what happened in the GFC in terms of delinquencies. I mean -- I realize it's quite early days, but I mean, how do you expect it to pan out this time? And do you expect the sort of similar changes to the market we saw during the GFC to occur now?

So we look at it a couple of different ways, right? So I mean part of the GFC was a number of -- a great deal of loans that were written that just shouldn't have been written, right? Where, at the moment, it's really all about the impact the potential on homeowners, on unemployment, and other areas, yes, and it's sort of potentially broader, right, than it was at the GFC. So there's some difference of circumstances, et cetera. Now I think what we alluded to was we do expect the number of nonperforming loans to go up. The loan quality is a lot higher than it was on the GFC. Whilst there's going to be some protection there because of people losing their jobs, et cetera, et cetera, then we should expect to see a slight increase. Now whether that goes above what we saw in GFC, is pretty difficult to tell. Out of an abundance of caution, from an advances perspective, we are just about to finalize a new $100 million facility with a third party, and that's very close to being finalized. And that just gives us a lot of headroom by being able to place it into that sort of the nonrecourse of debt that is advances. So look, I'm not saying I'm an expert on what's going to happen default-wise in the U.S. property market, Nigel. I do think that it is a little bit different from the GFC. It might be a little bit broader than the GFC. But I'm not sure whether it's going to go above double digits, especially not for the quality of product that sits between the 2 government agencies we do work for, yes? Now if we did the work in say for Ginnie Mae, I'd be thinking about that a lot differently, yes? But what we do is for Fannie and Freddie, which is the higher quality loan.

Okay. And I mean, during the GFC, you did see quite a lot of sort of new entrants stuff as well. I mean, I know it's sort of crystal ball stuff, but I presume a lot of that, I think, was -- you don't have the bank situation like you did last time. So I presume you're sort of not expecting that necessarily to repeat this time around?

No. Look, I think that -- look, I think because of some of the advance situations, you'll find some servicers that will be a little bit stressed. And as I said already, we've already had inbound from some of the banks to say how much capacity do you have on special servicing, yes? And can we move from special servicing, subservicing to you under these circumstances. So both the banks and some of the government agencies have recently been inquiring. So I think net-net, that will be -- end up being an opportunity for us, Nigel.

Okay. Fair enough. And then just briefly on the U.K. I mean, you did sort of confirm that the transition will happen in May. But is that sort of actually a drop-dead sort of 31st of May it's all done? Or does that actually take a bit of time to switch everything else? And therefore, I guess the real question is, will we get the full $35 million of savings in '21 or will it be slightly less than that?

So yes, I think you're absolutely right. So we expect, and I think we said this at the half year as well. We do expect decommissioning exercises to take place through to September and not all the technology contracts, et cetera, switch off at the end of May. Most of them switch off at the end of June, and then some of them that switch off at the end of September. So if all goes well, then I think there will be some of the costs that will get a 9-month benefit off, but most of the costs will be a full 12 months.

The next question comes from Ed Henning from CLSA.

Most of mine have been asked but just a couple. One follow-up, I guess, from the first one from Kieren. Just on -- if you look at your guidance and you look at where it's coming from, roughly about 1/3 of it is from margin income. Can you just break down the other 2 parts? You called out transactional revenue and foreclosures. Are they about the other 1/3 each?

Yes. Look, it's probably -- look, it's not that far off, Ed, I think. As it were in Computershare, there's a raft of sort of ups and downs. But the stop on foreclosures is probably a decent-sized component on it. And then probably the employee share plans, with a little bit of shareholder paid fees and issuer would be the other components. Yes, that's the ones that we're seeing as sort of kind of a little bit of an impact now. And the reason we do that is we can see that happening right now, that's affecting us right now, right? But there are these potential offsetting things, but they are sort of down the track, yes? So -- but I think that's really the areas, that's the revenues in U.S. mortgage services around foreclosures and then the transactional side of employee share plans. Now employee share plans one is a little bit interesting because every company goes a little bit different, what price the stock was issued at, et cetera. At the height of the volatility, which -- and I don't know what's going to happen tomorrow, but the height of volatility in the marketplace, we saw sort of the number of exercises or individuals exercising up to 40% lower in some companies than we saw the previous year. Now the good thing is, what happens is that stock stays in the plan, right? So it's not a stock option. They've just chosen not to exercise at the exercise date. So down the track, there'll still be a transaction. It's really about a deferral of revenue. You might want to think about it that way. But then most recently, where sort of markets have not been going down plus or minus 10% a day or whatever, that level has only dropped around about between 10% and 15% for other companies. And again, the ones that have chosen not to do anything are likely to come in at a later stage and do the transaction. So it's a deferral.

Okay. And then can you just touch on -- I think you mentioned it before, but just how long you think the foreclosure is going to go in the U.S.? And if you -- I know '21's a little bit early now with what's going on. But can you see, with potentially more subservicing and other things coming in, offsetting an extended foreclosure continuing on?

Yes. Look, we do. So look, we self modeled it through until June. And look, it is conceivable that we continue to provide that support at this particular time. But there'll be a fair amount of pressure the other way to get that sort of moving again. I think what will happen is we will -- as you know, we start -- we get more fees under that scenario when people stop paying and we happen to modify loans, et cetera. And then I think it will also be potentially offset by an influx of subservicing capability that we have for some of the loans, which will also help offset some of the delays of foreclosures as well. So look, I think that U.S. Mortgage business, whilst it's fairly large and complex, I think there's a reasonable amount of opportunities there in this environment for us, yes?

Okay. And then just last, a small one. You're looking to increase the facility for the U.S. mortgages. You talked about the syndicated debt. Can you just give us any indication on how much more expensive that's going to be if it is?

So it's -- look, it's a little bit early. That really depends on what our options are. So we're looking at either extending it by 12 or extending it by 3. And it's a little bit early on the pricing on that one. Yes, we'll see which one actually makes sense and gives us the headroom that we want. I mean normally, we would go out and look at -- for a tranche of about $450 million and the relationships we have with banks around the globe. And you have to remember, we're a big depositor into banks as well, Ed. So we've got a pretty broad relationship with them. And not -- in a normal environment, we'd be sort of looking at this around about October-ish time. But prudently, like most organizations, we sort of brought it forward, just to keep an eye on what may well be happening in the credit markets, and we'll look to extend, and we'll either sort of choose a 1 or 3, depending on what we think pricing will be. But certainly been a widening in spreads over the last few weeks.

Okay. And just one final one. Going back to a question before, talking about the risk of potential write-downs of the MSRs and said at the moment, you're comfortable. How much further would MSR values have to fall for you to see a potential impairment?

Well, look, the way that plan -- the accounting works, is all against the cash-generating unit of U.S. Mortgage Services or mortgage services in general, which, as a result, the way in which that works is significant headroom. I mean, Nick, do you want to add any more to that?

No. Look, I think that's right, Stuart. We really look at the residual life remaining in the MSR portfolio. So count how many months and years of cash flows do we expect to have with reasonable run off rates to justify the ongoing amortization period in the book. And so we look at the fair market valuation of the book because we have to apply U.S. GAAP accounting purposes. And we monitor that. We know that the market is -- that's something the market looks at, both here and in the U.S., on a regular basis. But in terms of any kind of ongoing carrying value of the book, it's really about the residual life in the portfolio. That's the key stat. We look at that on a regular basis, and we're comfortable that we still have got 9 years worth of life left in the MSR portfolio. Remember, the book is a blended book of both nonperforming and performing MSRs. And so over 50% is nonperforming assets or mortgages that are very, very difficult to refinance. So the refi -- the heavy refinance activity that we're seeing in recent times is -- has been confined to a small portion of the overall portfolio.

We have no further questions at this stage. I'll now hand back to Stuart for any additional or closing remarks.

Well, firstly, thank you all for joining us today. As ever, we really do appreciate your interest and support. And let me say again, whilst it's frustrating for me to have to revise guidance again, especially so soon after the last change, I do hope you obtained a better understanding of what we're seeing at Computershare and how we're placed at the moment. And we also commit to keeping you up to date in the coming months with what's happening around the group. Now we normally do an Investor Day in late April but whilst we're dealing with all the moving parts, we're likely to defer that to later in the year. But I would hope to come back with you in May for a further update about what we're [Audio Gap] So thanks again. And as always, we're available for follow-up questions, and I appreciate your support, thank you.

That concludes the Computershare investor update. Thank you once again for joining us today, you may all disconnect.