Computershare Limited (CPU) Earnings Call Transcript & Summary

Welcome, everybody, to the Computershare Investor Town Hall. [Operator Instructions] Thank you again for joining us today. I'll hand 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 our IR team are here as well. Now this is the third in our series of investor town halls. Now the aim of these calls is to give you a timely and transparent insight into how our businesses are performing during this period of heightened volatility. On the call, I'll provide updates across our major business lines as well as some insights into what we're seeing in our main markets and then take some questions. Now we did release a new presentation pack to the ASX last night, which I'll refer to throughout the call. So let's start with Slide 2. When we last spoke to you on April 7, it felt that we're really in the eye of the COVID storm. Now at Computershare, many of our services are nondiscretionary in nature for our customers. And as a result, our key business lines are robust. And excluding margin income, they're actually operating resiliently, but of course, we're not entirely immune to overall market conditions. During this period of unprecedented disruption, we've continued to deliver high levels of service to our customers, often remotely. We have lobbied for exemptions to market regulations to help our customers communicate with shareholders and built and deployed products in days rather than months. And I'm really proud of what the team has achieved in this period of heightened stress for many. We are well organized, and our people are highly skilled and competent. And that's coming through strongly in the client feedback that I receive, and I think that it bodes well for the future. But during this time, we've also maintained our sharp focus too. Projects need to carry on, and we're continuing to execute our long-term growth strategies. At Computershare, our plan is to build stronger businesses with scale and more exposure to positive structural growth trends. This focus on long-term planning, disciplined execution, investing for growth and driving efficiencies is absolutely unchanged. Now there are some early signs of improvement in our cyclical and event-based revenues. Now it's too early to call it a recovery, but there are some encouraging trends, and I'll talk about some of them more later. Next, our countercyclical revenues are also building momentum. Now these include capital raisings and bankruptcies, and we have some additional disclosure in this pack for you today. And my final point here is, with this operating resilience and growing stability, we are maintaining our previous guidance for management EPS to be down around 20% for FY '20. So moving on. Slide 3 is really a quick snapshot for you. But because I'm going to talk about the business lines in detail, let's just go straight to Page 4. Now our earnings are clearly being impacted by the decline in margin income. Now there's no hiding from that. Compared to the $246 million we earned in margin income last year, we expect to earn around $180 million this year and around $100 million for next year. Now these are not new numbers, but they are big drops in high-margin revenue for us, and they are depressing earnings per share. Now of course, our challenge for the next few years is, of course, how to replace this high-margin revenue. In the table on this page, we provided you a view of the breakdown of margin income by business line for both the second half of FY '20 and also a projection for FY '21. Now as you can see, almost all of our business lines are affected by the impact of lower interest rates. And hopefully, this new disclosure will be helpful. Now some of the business lines do have the ability to put in more duration in deposits than others, and that explains why the drop is not linear across them all. Now let's move to Page 5, and I'll be spending a little bit of time on this page. In U.S. Mortgage Services, there are really 3 key points I'd like to make: strategy, growth and value. So first, strategy. Now while there is volatility in the market with runoff in performing loans, delinquency and lower market prices, et cetera, our strategy is really unchanged. We're an asset servicer, not an asset trader. And we manage this business on a long-term, through-the-cycle basis. Now this is important because we make careful investments in MSRs every year at below-market prices, regardless of market conditions. And our goal is to control the duration of our servicing revenues to build a sustainable business. We service the mortgage for the life of the asset. We assume mortgages last 9 years on average, so our single most important metric in this business is duration and, therefore, the revenue profile. And the market volatility on asset prices doesn't affect our servicing revenues or cash flows. The second point is growth. The servicing book continues to grow at a disciplined pace. We now service around $118 billion of UPB, and we're doing what we said we would do and building scale in a disciplined way. Now this growth includes a combination of performing and nonperforming loans, as you can see on this page. And the third point I want to make is on value. There's been a number of questions around MSR prices and book value and market value, so let me try and break this down as simply as I can for you. At the half year, we reported the book value of the MSRs we own at the 31st of December at around $440 million. Now there are 2 factors to bridge from this number to the current book value, and that is runoff and purchases. Now runoff has 2 parts. The first is straightforward amortization. Now our amortization cost $23 million in the first 4 months of 2020, and that's pretty much exactly as we expected. The second part is additional or, as we say, elevated runoff. Now this is not included in book value as we amortize on a straight-line basis, but it does help us bridge to market value, as you can see in the chart. Now it reduced the market value by some $27 million. That's a manageable number. Runoff levels were high earlier in the half as we called out, but we're starting to see them moderate now. Now let's also turn to purchases. Purchases have exceeded runoff in this period, which is why book value at 30th of April has grown to $485 million. Now purchases are also split into 2 groups: maintenance CapEx to replace amortization and MSR investments to grow the book. Now we have always reported the breakdown this way in our cash flow statement, so you should be familiar with this. With the recent volatility, MSR prices have been reduced. And accordingly, we've been able to acquire similar volumes of servicing as over previous months, whilst deploying less capital. Now let me give you an example of that. Now in April, our net spend to acquire $2 billion in UPB was around $10 million. That's around half as much as it might have cost historically. So the return on capital from this particular month's purchase will be higher. In the first 4 months of the year, we spent $23 million on maintenance purchases, and that's offset to amortization, as I said, and an additional $45 million on MSR investments to grow the book. Looking forward, by June 30, we do expect book value to have reduced to around $440 million, which is effectively the same level as it was at the start of the half. We expect ongoing amortization, a strip sale to recycle capital and some more MSR purchases as per the plan. But looking at it another way, the same level of capital is supporting a larger UPB servicing base and generating greater revenues and cash flows. Now what about market value? If prices are lower, what does that mean for the MSRs we already own? So the question is, is the market valuation different to your book value? And the answer is, yes, it is different. It's always different, and it swings from premium to discount through the cycle. And of course, market prices never follow straight lines. Now before I take you through the numbers, as you've heard me say, we report this business under Australian IFRS. We amortize MSRs we buy on a straight-line, 9-year basis, and they are tested for impairment at each reporting date as part of the Mortgage Services cash-generating unit. So short-term fluctuations in market prices don't affect us other than in local U.S. stat accounts where mark-to-market is required. We also have our portfolio valued by external specialists. It's a good discipline, and we've done that exercise right from the start and continue to do that. And they update their valuation models for changes in interest rates, runoff risks and derive new market value estimates. Now if we marked to market the MSR portfolio today, the market value of the book would be about $364 million. Now this is a point-in-time number, and it does not represent an impairment to the book value. We continue to regularly review our amort policy for MSRs to ensure it is materially in line with both historical and anticipated runoff. And we'll do this exercise as part of June year-end reporting process. And any change to the amort policy at that point in time will be on a go-forward basis. So to finish on this page, runoff is an important metric for our business model, and it's moderating, as we said. MSR prices are down, but it's at a point-in-time view in a period of heightened volatility, and it doesn't affect our servicing revenues or cash flows. With purchases at lower levels, we can improve the duration of our revenues and our returns on capital. And we will always maintain our disciplined approach to growth and buy MSRs at a discount to market. And with strip sales and sub-servicing, some excellent opportunities are developing. And we're on track to build our sustainable, high-quality servicing business, and the next stage in our growth will be less capital intensive. I'll now move on to Page 6, and let's look at some of the other shift in the market and how it affects us, which is something called loan performance. And this issue is really trending in line with our expectations. In simple terms, there's a sequence here. Forbearance requests are the lead indicator for delinquency rates, and delinquency rates trigger advance payments. And we show you this data on this page. I mean to cut through the detail, let me touch on the main points. One, forbearance requests are flattening off after peaking in early April. The market is stabilizing and fewer mortgages are asking for relief from payments. Delinquency rates are also performing to expectation. Now our rates on the performing books rose initially to around 5% levels and are now flattening. And the serrated green line on the top right-hand chart shows they're at similar levels to what we saw in early April. And we track this data weekly. We may well still see an increase in COVID-related delinquency in the next couple of months, but what we're seeing is borrowers are trying to stay current with their payments. As a result of this, advances are also in line with our expectations. Now we did take on a new book of loans and as part of the growth in UPB, which recently increased our advances, but the underlying rate has been stable. And given we're less than 2 months out from the end of the financial year, we can see that our net advance capital should finish FY '20 at roughly the same level as it was at 31st of December or around about $100 million. Now that's clearly a much better outcome than many had anticipated. And we have substantial headroom in our advanced debt facilities. Now I'll finish on Mortgage Services with a shift to the U.K. Now even though we have been working remotely and saw a substantial inbound operational increase due to the U.K. equivalent of forbearance or mortgage holidays, as they call it in these parts, we have successfully completed the migration of all the outstanding loans from the UKAR platform onto our proprietary U.K. mortgage platform. The job is done. Excellent remote management and the support of the U.K. Asset Resolution team carried us through. And we will start to see the synergy benefits accrue with the full run rate from September. And I'm really happy to close off on that chapter. We do, however, have our work cut out in the challenging U.K. mortgage market as far as new originations go, but we're now in control of all our costs and can continue to manage that closely as we await recovery. Now let's go to Employee Share Plans on Page 7. Since our last call in early April, we have seen some encouraging developments in that business. Issuer paid fees increased in April by 13% on the pcp, and clients are supporting higher participation levels in these plans. And we've had some good new client wins, too. So you can see that the recurring revenues in this business are growing. We're also seeing some stability coming back into the more market-linked transaction fees. And looking at the trend on a month-by-month basis, these fees fell by 34% in March versus February at the height of the volatility, but they have leveled off to a 4% decline in April compared to March. Now remember, too, that when an employee chooses to postpone the exercise, our revenues are deferred rather than lost. And firstly, we also showcase a real case study here of issuance in a bear market. And this is what we've been calling the equitization of remuneration and why we like the underlying structural trends in this business. The table on the bottom right is a client that has increased the volume of issuance by over 200% for its grant this year. Now the client share price has fallen some 22%, however, the volume of units have more than offset price and the value of the units issued has risen by 70%. And that's not an isolated example. We are seeing that. And my personal view is they're taking cash bonuses, loading cash bonuses and expanding out the stock allocations. Now there's also some other trends I'll call out on our main Issuer Service business on Page 8. Now Register Maintenance is operating resiliently. Client fees for April are marginally lower, although the number of shareholders we service is increasing. In the U.S., it actually grew by 0.4%; and in Australia, it's up by almost 4%. There's also a good example here how we've been at the forefront of allowing our customers to meet their governance requirements at this difficult time. With physical meeting restrictions, we have been helping clients transition to virtual meetings, and we have successfully delivered over 400 of these with another 525 of them in the planning. Momentum is also building in Corporate Actions with increasing activity levels. We've seen 161 new corporate actions since mid-March. IPO activity in Hong Kong is reasonably strong. And also, some U.S. issuers are also looking to have a second listing there. And also, IPO activity is up 80%, and the outlook is positive. And as you've also seen, capital raising activity in Australia and New Zealand has returned, and we've been well represented in the raises here. There's also early indicators in the U.S. Now we can't control the timing of these events, but the pipeline is good, and this activity is also supporting client balances for margin income. Turning to Slide 9, an update on Business Services. Now this is another area where we're seeing positive trends. There's decent momentum in what we call our countercyclical revenues. We've been appointed to administer 26 new bankruptcy cases so far this calendar year. Now that's more than we had in the whole of 2019. Of course, it is Chapter 11 filing that is a key for us. But we've also given additional disclosure here with the past 10 years revenues for this business to help you take a view on how much of that margin income hole it may fill. And in Class Actions, we've been appointed to around 80 new cases this year, where we typically have around 20 cases per month on average. Although with delays in court proceedings, I expect a bit of lag in earnings. And elsewhere in Business Services, Corporate Trust revenues have been benefiting from increased activity levels as Canadian banks issue large amounts of covered bonds, and this has offset the impact of lower rates for this particular period. Now on to Slide 11 (sic) [ Slide 10 ], capital management. As you can see here, our balance sheet is well placed to fund our growth strategies. We're well within the target leverage range at around 2.15x at year-end, we think, roughly, and net debt is coming down organically. We're also well within our banking covenants, which incidentally are linked to EBITDA, not gearing. And with the refinancing of the $450 million 2021 facility significantly progressed, our balance sheet provides the strength and flexibility to enable us to execute these long-term growth strategies, make careful bolt-on acquisitions, take advantage of lower-priced MSRs and make distributions to shareholders. And I guess that's the benefit of having a capital-light and cash-generative business model. And finally, I'll move to Page 11, just some simple concluding remarks. In a nutshell, even with heightened volatility and all the disruptions we have seen, it's effectively business as usual here at Computershare. Our key businesses are operating resiliently, and there are positive signs in our cyclical businesses, ex margin income, of course. Momentum is certainly building in our countercyclical businesses, such as bankruptcy and capital raising. But as I said, margin income is woeful, albeit unchanged, that is depressing our earnings. But in the meantime, we are focused on what we can control, that's executing our strategies to build stronger businesses and deliver high service levels for our clients. And one day, as they say, in a galaxy far, far away, where the cycle is stronger, I'll talk about the optionality we've retained across our business and how that's converting into profitability. But that might be some time away, but I do look forward to the call. Now on that note, I'll open up the line for questions.

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

I just wanted to circle back to Slide 5 to the U.S. Mortgage Services. In your comments there that sort of lower MSR pricing doesn't impact revenues and cash flows, but sort of -- I would think those lower prices are partly reflecting a faster amortization expectation in the market going forward. So you had referenced your review amortization rates sort of as you come through 30th of June. Is it likely at this stage we're likely to see that 9-year period reduced in your view?

We've done some modeling out and not at the moment, but I think that a month and a little bit away, we'll do the review. If we feel that it's necessary, we'll increase the amort of -- or sort of lower the amort period, which would obviously increase the amort charge. But that would be on a go-forward basis, not historical. But look, that's all work that the accounting firms and the Risk and Audit Committee will go through. It's not something that obviously impacts us from a value, a revenue and cash flow perspective on that side. So look, I'm not anticipating it, but we'll see where we get to this, and that work has yet to be done.

All right. And secondly, when we have a look at the UPB growth over the 4 months since December, in the chart you've provided, it's clearly driven by sort of MSR rather than sub-servicing. But clearly, you've been flagging, over the last month or 2, more opportunities in the pipeline to do sub-servicing work, particularly around nonperforming loan books. Can you just give us an update sort of as to how you think that is progressing and whether or not the shift to more capital-light growth is imminent?

Yes. Look, I think sort of pre this period of time, we're making sort of good progress with a range of opportunities. And then a lot of these opportunities have just been put on hold as the financial institutions work through what they need to work through at this period of time. But what I will say is that with the foreclosures being put on hold, there's sort of pent-up demand and would be specialists. And when they would come over, they would likely come over as third-party servicing books rather than MSR books. So that bodes well as far as that's concerned down the track.

Okay. And what's your expectation around the moratorium on foreclosures? I mean I saw that was extended to 30th of June last week, I think, but sort of you would still be expecting that to be pushed out further, would you?

Look, I think that's probably about right. I mean it really depends on where the U.S. thinks that they're actually going. I think my gut feel is that they may well extend it towards at least September, possibly the end of the calendar year. But yes, it's a little bit of a guesswork on that one, Kieren.

And final question, just on U.K. Mortgage Services. Does -- I mean the platform integration is clearly sort of positive, as you mentioned, but sort of lack of new originations. Does it change your medium-term strategy around that business at this point in time? Or do you think you just need to give it more time for market conditions to settle?

Yes. I mean, obviously, we had some of the -- look, there was challenging market conditions. We had a range of the challenger banks ended up pulling out of origination because of challenging conditions. Then what's been happening over the last couple of months has added into that. There's been a lot of product withdrawn from the marketplace by a lot of mortgage providers, et cetera, but then there'll be a little bit of pent-up demand once that finally actually comes through. But you're right, that part is uncertain. And it -- I mean most of our growth has actually been from taking on books from asset traders rather than relying on a loan-by-loan basis for some of the customers, and we continue to be able to sort of operate in that environment. But as you said, the good news is we're now in control of all the costs, and we can get that business running more and more efficiently and focus on getting the cost out and give the market time to -- the mortgage market in the U.K. time to recover.

Your next question comes from Ed Henning from CLSA.

Just the first one on the balances. The balance is obviously up from your last disclosure. Can you just run through what drove that? And with your guidance, is it just a little bit conservative in it to start with?

Well, we went out 1st week of April, so we really had March's numbers and balances in March were pretty crap. Yes. There was the shock factor about what was happening in the marketplace, a lot of deals kind of got sort of halted, et cetera, et cetera. So it's a little bit difficult to gauge where that number was actually going. You're absolutely right, the number that we're anticipating on the second half is up from what we previously thought it was, and that's because it's come from some different places. We've done a decent amount of work up in Canada in the Corporate Trust business with the Canadians of the housing market up there and holding balances for a period of time with some of the emergency stuff that the Central Bank or Bank of Canada have been doing. So that's helped balances. There's been -- there's 1 or 2 large corporate actions that get away in the U.S. in the period, which helped the balance mile -- it's a little bit of a dark arts trying to predict exactly what the balances would do. So you're right, they're up. Is it -- will it continue? Hard to tell. So we put that new number in there, but we've just sort of held the anticipated margin income number where it is at the moment until we get a little bit more view on it.

Okay. But rates haven't fallen from your previous assumption?

No, no, it's not, but -- no, they haven't.

No? Okay. Next one, just on costs. You touched a little bit about it, some on track. Can you just run through broadly how you're thinking about your multiple cost-out programs and your ability to do those as we move forward in this environment?

Yes. Look, I think I've seen a few organizations pulled the pin and say, this integration is going to stop or that's going to stop because of market conditions. I mean, as I mentioned earlier on, we have the Equatex integration where you do synergies we've actually been doing migrations remotely, no staff in the office. We managed to achieve that. We achieved quite a complicated UKAR mortgage migration remotely. So we continue to execute on these large-scale projects. The cost-out program in Mortgage Services in the U.K. continues to go, and then our other cost-out programs even more so. I mean you know the drop that I've got in margin income coming in next year, and we're working hard to see what can we actually accelerate if we sort of apply resource and et cetera, et cetera. So we're working hard on that, that these cost-out projects, I'm certainly not taking the foot off the pedal or literally off the neck of some of the employees who are responsible for delivering some of these cost-outs. So we will continue to go at it and go at it hard.

Okay. That's good. And just one last -- or actually 2 other quick ones. Firstly, virtual AGMs, is that lower-margin business than a physical AGM?

Look, it is in some regions where we do attendance. So in the U.S., not really, because we don't really attend the Annual General Meeting in the U.S. But for example, in Continental Europe, we may well have 2, 3, 4, 5, in some cases, 35 staff at meetings. Yes. And you don't do that. You're going to virtual. Now the good thing is, we make a little bit higher margin on the provision of the software, et cetera, et cetera. However, you just don't have the physical number of people, especially in Germany and Italy and a few other places. So yes, that will drop a little bit. And it's also one of the points right down at the bottom of Page 3 of the deck, our communication business who actually produces all the documents for annual meetings and other bits and pieces that they will have, they've had lower volume through as we sort of emergency switched to virtual.

Okay. And then just one last one. I'm just following up on foreclosure. Obviously, there's pent-up demand there. Can -- maybe, Nick, you can answer this one. If you think about the ancillary revenues, what kind of rough percentage of foreclosure is of that revenue?

Look, it's probably around -- of those ancillary revenues, it's probably about 5%, something like that.

Of this total revenue or of the ancillary revenue?

Yes, of the ancillary revenue.

Your next question comes from Andrew Buncombe from Macquarie.

Just 2 quick questions from me, and apologies if we're going over old ground with this. But just in terms of your net debt-to-EBITDA ratio, is that being assessed on current constant currency or actual currency?

Sorry, that's being assessed on constant currency.

Okay. Great. And then the second one, in the announcement to the market from about a month ago, you came out with your expectations on the average group balances. So the equivalent to Slide 4 this time around, you came out with your expectations for the fourth quarter '20. Are you able to give us a bit of color as to how you think that's changed? Or is that unchanged?

It's not significantly changed. Look, I think if anything, it's a little bit on the upside because we have had slightly higher balances through the month of April than we perhaps thought when we put out that deck on the 7th of April. Yes. So that's probably been the factor that changed. Rates haven't really, but higher balances.

Your next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask 2 questions. Firstly, with regards to dividends for the June half and again for the December half, are there any special considerations that we should keep in mind given the current circumstances of the economy?

As an -- so we paid our interim and then the Board will consider the dividend policy and which will be done really around about early August. I mean our goal is to try to obviously maintain. There's been a lot of organizations cutting dividends for one reason or the other. We'll look at where we're at. But it's -- we're a couple of months away from actually doing that. So nothing -- we're not flagging anything at the moment.

Cool. And my second question, just thinking about the core share registry business. The detail you've provided suggest that customer numbers are increasing, and yet the kind of April year-to-date issue of paid revenues are down 3%. So am I reading that right? And is that implying over 5% price decline per customer? And what...

No, no, no. I think you're probably reading a little bit too much into that, right? So customers also pay for Annual General Meetings and other bits and pieces, right? So you can see and we discussed previously that the move to virtual has impacted a little bit of these revenues. Yes. So it's not really a pricing decline on the -- dividing the number of shareholders by the revenue, et cetera. There's a few other bits of detail in there. Yes. I think it's just anecdotal. In the past, people think that U.S. shareholder numbers continue to decline. We've actually seen a slow in that. We actually see the numbers increasing. And again, in Australia, we've seen a reasonable pop over the last couple of months. I think there's also been a slowdown on the move to the Street as well, just as people go through this period of heightened volatility. But on the downside of that, that does affect some of our shareholder paid fees as well.

So then just to double check, what is the 3%? Is that in the month of April on pcp? Or is it April year-to-date?

Yes, yes, yes. No, no, that's in Australia. Yes. That's what we were talking about. Sorry, let me just pull up the slide to make sure I get it right.

Yes. And probably it's just safer saying, issuer paid revenues marginally down circa 3% April pcp. What is that? Is that a monthly or a year-to-date fee?

Monthly. Yes, so it's comparing it on the pcp.

Your next question comes from Ashley Dalziell from Goldman Sachs.

Just wanted to follow up on the ancillary revenue discussion around U.S. Mortgage Services. My understanding was that outside of the foreclosure piece, the bulk of those revenues are sort of linked to origination activity, which sounds about it's firing well at the moment, at least. Can you give us any insights into, I guess, what that component of ancillary revenues has been doing over the past couple of months and sort of expectations for the remainder of the calendar year?

Yes, that's been performing in line with our...

Nick, do you want to take that?

Yes, sure. Sure, yes. So the origination side of the business has been performing in line with expectations and haven't really impacted so far. As Stuart said in his earlier speech, we are seeing signs of refinancings and runoffs moderating and what that's done. And so we're seeing a reduction in the level of applications coming through the origination of fulfillment business, but it's not had a material impact on P&L.

Okay. That's great. And maybe just coming back to the UPB waterfall on Slide 5. It's helpful disclosure. But maybe just help us with sort of where CPR or prepayment rate kind of got to in the month of April. And are you expecting it to level off at those levels or sort of levels more consistent with the March quarter?

Well, the March quarter was quite -- we saw elevated runoff there. There were still some accelerated runoff in April because the way it tends to work is there's a bit of a lag between the application for the new mortgage and that actually paying off as you can expect. So we still saw -- April was consistent with March. And through the back end of April and into May, we're seeing a leveling off of applications. So over time, we would be -- we'd hope that to see the levels of CPR go back towards our normalized expectation, which is around our sort of 9-year amortization level. Clearly, the market is pretty volatile at the moment. So you've got a couple of things happening. You've got all of the aspects of COVID-19. You've got people not being able to -- and then you got a large population of people who are not able to refinance because they're being made unemployed or they're on furlough or what have you. So you've got a split in the market in terms of borrowers and you've got credit tightening. You've got originators, lenders looking at borrowers' credit in far greater detail than perhaps they were before. So all of those things suggest to us that we should see the moderation continue. And -- but as we said, it's a pretty volatile situation.

Great. Maybe just one final one for me. Just on the forbearance takeup that you've seen across your book to date, is your expectation that sort of at the end of that first 6-month period, you're going to get the opportunity to modify the bulk of those loans and transition them into kind of a delinquent status? Or are you thinking that, that might sort of happen at the end of the second 6-months period?

We think there'll be a split. There'll be some that we'll be able to modify sooner, and there will be a proportion that will probably extend and will take longer time to modify. We're currently looking at modification activity over the course of the next 12 months at least.

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

Just a follow-on from that question as well. If I could just quickly ask, when a loan is modified, does that mean that advances would stop at that point in time?

So under the agency loans that are the predominant portion of our MSR portfolio that is -- that we'll need to advance upon, we cease advancing after 120 days. So we advance to the bondholder the first 4 months with principal and interest. And after that, we cease advancing.

Yes. That's clear. And just the second question then still on advances. Do you expect the level to stay sort of broadly similar to where we are today for the end of the June period, say, circa $100 million or something like that?

Yes. Yes. That's what we're anticipating at June. Look, I think it may well pick up as unemployment situation and other things have changed down the track a little bit. But as far as June is concerned, yes, we're anticipating it around about $100 million mark.

Sure. And just the last question. I think last time we spoke, you did talk about some project or bespoke work in the Issuer Services business, which you'd sort of said was higher-margin type of work. Just wanting an update on that whether it's progressed or been delayed or anything like that.

Yes. So these were the stakeholder relationship management segment, which is now within issuer services. So there were some large funds that were going out to their fundholders on proxies. We had one of them that was postponed. And then on the heels of that, we had another fund that came in to us that was essentially let down by their provider in terms of their ability to actually staff up 300 to 500 resources at peak during this unprecedented time, and we were actually able to execute that for them. So we got a little bit of a replacement in there. But we did see a number of these types of sort of governance-related jobs just kind of get iced or deferred because they took a view that with a lot of people being concerned and worried, the last thing that they wanted dropping on their -- in their mailbox was a whole bunch of fund governance papers.

Your next question comes from Matt Dunger from Bank of America.

Are you able to talk to the EBITDA margin on Mortgage Services, the outlook for that given the shift in performing versus nonperforming and sub-servicing that you've been talking to?

Yes. Do you want to take it, Stuart?

Knock yourself out.

Look, the EBITDA margin for performing servicing typically is lower than what it is on nonperforming. And so as we look over the course of the next 12 months and we think about the impact of more loss mitigation activity, more special servicing or sub-servicing opportunities on nonperforming loans, I'd anticipate the EBITDA margin improving as a result of that. The point that we've got to remember, though, is that our margin -- the margin income that we generate on all of the float balances that we carry in this business is significantly reduced and so is the ability to generate revenues associated with foreclosures. So that will have an offsetting impact. So I think the way to think about it is we should look to have maintaining our EBITDA margin, excluding margin income, through FY '21.

That's great. And if I could just ask a broad question on the guidance, since the 7th of April, you're talking to mortgage services, employee share plans, corporate activity and countercyclical revenues tracking favorably. Where is the offset that's stopping you from talking to a better result on management EPS versus down 20%?

Look, at the time when we did the 20%, there was a bit of stretch in there because we had a general view that when we went out on the 7th of April with that guidance that things would slightly rebound. Yes. As I said in my speech, there's no way that I'm even close to calling it a recovery, but look, I think it's just pleasing to see. I mean most of the impact we have is at the margin income level across our businesses. And I think that aside, our underlying core businesses are fairly resilient, but there is some market uncertainty. So there's -- that's really the thinking that we came to when we got that. I think it's pleasing and it's heading in the right direction, but I just don't know if it's going to change direction.

The next question comes from Siddharth Parameswaran from JPMorgan.

Just a couple of questions, if I can. Firstly, just on the U.S. mortgage servicing business. Could you just give us an update on what your ROIC is doing on that business versus your 12% to 14% target that I think you originally said a year ago that you're expecting to meet this year? And also, how you're tracking against your 20% PBT margin on that -- for that business as well?

The -- so you've got to really look at it on before and after the impact of COVID-19 really. Before the pandemic hit, we remained on -- our servicing profitability was on track to or in line with where we thought it was going to be. But clearly, we've seen a big impact on margin income over the last couple of months, and that's impacting our margins as is the reduction in forbearances, which, as I said before -- sorry, the reduction in foreclosure-related activity, which impacts some of the more higher-margin activities within the business. So we won't get there this year because of those impacts. Absent that, our return on invested capital was continuing to improve. We weren't going to get to the 12% to 14%, though, because we had -- that was -- that assumed a stable business where we transitioned to capital and we've got to scale, and we've sort of taken the view that we would continue to invest and grow the business. So we'll be a couple of years off those returns. But operationally, the business was performing exactly where we anticipated it to be prior to the impact of all of the recent...

But on that, I mean, even if we exclude that, as you said, a lot of the growth has come from noncapital-light business, the capital-intensive purchases of MSR. I mean I presume that is leading to your ROE going down. And I mean, can you just comment on whether it still makes sense to pursue this strategy of growing this business? If you're not even -- yes, I mean we're getting to 10% at least, ex the COVID impact, and does it actually make sense to kind of growing this business?

Yes, because this -- we still get the -- we get benefits of scale as we continue to grow, and our returns will improve. We drive out more downstream ancillary revenues and we're positioned for greater scale, allows us to attract more sub-servicing opportunities. And we're now seeing opportunities of a size and scale that, quite frankly, we weren't seeing 2 or 3 years ago because we just didn't have the scale and the capacity to deal with it. So it certainly makes sense to continue to grow and to invest in that growth. There will be a point in time where we get to a stage where we're happy that we've grown it as far as we have, and we don't want to grow it any further. But for now, we see that there is sense in just continuing to grow that. And as we've said also earlier, we anticipate FY '21 being far less capital intense. And so as we get into that far less capital intensity, intense environment, we'll see the returns steer back towards where we expect to -- those free cash flow returns that you're talking about, we'll start to get there over the course of FY '21 is my expectation.

Yes. And just one last question for me. Just on the net debt-to-EBITDA ratio that you expect at 30 June, can I just be sure that, that takes into account the expected EBITDA for FY '20, right? It's not based on the FY '19 figure?

No, no, it's FY '20 EBITDA, yes.

It is FY '20. Okay. I just -- like I was just getting different numbers. So I'll just circle back and check that offline.

Yes. I'm not sure your projected FY '20 EBITDA is quite right. Yes. But circle back, we'll have a chat.

Our next question comes from Nigel Pittaway from Citigroup.

Just first of all, following up on the capital intensity of the mortgage servicing business. At the AGM last year, you were hopeful of getting a partner to be able to do that upfront. Can you sort of update us on the status of that, please?

Yes. Nigel, it's been a little bit of an interesting time as far as a capital partner and even selling excess strip sales because we've really seen a sort of protracted period of time with reasonable market volatility, right? So you had the U.S. rate drops early in the first half of the financial year, which kind of moved around the MSR market a little bit. So just from an excess strip perspective, we just decided to wait until that settled down and then we kind of launched into this period of time where there's a little bit of capital constraints with some of the partners in terms of focusing on some of the other bits and pieces. So look, it's not a strategy that we're not continuing to pursue. This is going to be a little bit of delay because we've seen a little bit of volatility for a longer period of time than we had anticipated.

Okay. Maybe just a broader question on the mortgage servicing business as we look through into next year. I mean, obviously, you're doing the excess strip sale, which is good for capital, but it does lower the revenue. You've got the likelihood of accelerated runoff, albeit I know you say it will slow short term, but presumably when everyone comes back from working from home, that could increase. You've got the impact of the ongoing moratorium on foreclosures and, obviously, lower margin income as well. Yet against that, you're hoping to get more nonperforming sub-servicing and probably more loan modification fees. Can you give us sort of -- I know it's a bit uncertain because you don't know yourself, but I mean, are you confident that the positives there are going to outweigh the negatives as we look forward into next year?

Yes. Look, there's a few headwinds there that you've listed. There's a few positives there that you've not -- like the price at which we've been buying MSRs in the marketplace over the last a couple of months and what we'll actually achieve there. I mean, look, this is a business that's in growth mode. As we've already talked about, there's a series of things that sort of destabilized it over the last 9 months or so. Look, we still think that, that business can continue to grow. But you can see on the chart, the impact of margin income on that business. It's also a point in time when we do these excess strip sales, et cetera, et cetera. So look, it's a business that is going to be impacted like many, many other things about what's happening in the world at the moment. But we also see pretty substantial opportunities and people knocking on the door. And Nick talked about getting an opportunity to actually look at very sizable books, help some of the banks that as we know that there will be a little bit of pent-up demand for some of these specialized services, et cetera. So we're actually seeing some reasonable opportunities. Yes. I think the question is we just got to be a little bit patient, yes, see how everything plays out.

Okay. And then maybe just a final question on issuer services. I mean presumably with margin income subdued, obviously, the amount of money you're going to get from corporate -- the amount of revenue you're going to get from corporate actions changes a bit. So is there any more guidance you can give, just if you sort of took those items you've listed on Slide 8? How are they likely to -- if they start to come through, how are they likely to impact revenue? How much of a lag is there? And what's the most lucrative part of those sort of corporate actions for your revenue moving forward?

Yes. Look, I mean I think that from a corporate actions perspective, rights issues, et cetera, tend to be the slightly higher margin, but they're also very high risk as well, not all fully automated and et cetera, et cetera. Like I think the trajectory of the issuer services is okay. I mean even sort of ex margin income, we are anticipating sort of continued growth across that group who's instilled sort of extra sort of cost-out program to help offset some of that loss of margin income within that particular business. And we continue to sort of execute on our strategy. We'll have the full year benefit of Corporate Creations, an acquisition we did a few months back, et cetera. So the key with that business was, obviously, the additional revenue pools that we're looking to sort of grow into. And I think it would be a fair assumption that switch business might be able -- it's very hard at the moment. People have got other issues that they need to deal with in corporate. So I think, again, the mantra there is a little bit of patience.

Okay. And just maybe just a bit further on how those corporate actions might come through, you think. I mean, is the U.S. activity improving? I mean, is the U.S. as lucrative as, say, Hong Kong IPOs, probably not, right?

No, no. So look, I mean, the best -- in the U.S., the best one there is mergers and acquisitions. That's really the key for -- the way in which they do capital raises over there, they don't really hold sacrosanct the rights of the retail shareholders. So they'll just dilute and do place. I mean, obviously, Hong Kong IPOs, rights issues in the U.K. and Australia and New Zealand and to a certain extent, Hong Kong are the best ones for us. And then cross-border M&A or U.S. M&A are really the key to increased corporate action numbers revenue-wise at Computershare.

Unfortunately, we're out of time for questions today. I'll now hand back to Stuart for any additional or closing remarks.

Yes. Well, first of all, thanks very much for your time. I hope that from the deck that you can see that many of the underlying businesses in Computershare are fairly resilient. We are seeing encouraging signs, not calling a recovery, but certainly against what we saw through March. It's business as usual at Computershare. We're maintaining guidance. And we said that right at the start, these calls are really designed to give you some timely and transparent insight to what we're really seeing at Computershare. And I hope that you actually find the additional disclosure useful. So stay safe, everybody, and we'll talk soon. Thanks very much.

That concludes the Computershare investor town hall. Thank you once again for joining us today. You may all disconnect.