SYDNEY (Reuters) - U.S. private equity giant KKR & Co LP moved to bolster its presence in Australia's lucrative mortgage market on Wednesday, joining a rush of players hungry for a slice of a property boom even as the sector shows early signs of slowing.
KKR Credit Advisors LLC made a $500 million bid for non-bank lender Pepper Group Ltd at an indicative price of A$3.60 per share, a 4 percent discount to Tuesday's close. Pepper shares sank 7.2 percent to A$3.48 on Wednesday.
Australia's A$1.7 trillion ($1.30 trillion) mortgage market is highly profitable with very low delinquencies and lucrative commissions.
Last week, publisher Fairfax Media Ltd followed rival News Corp with plans to enter the mortgage broking business which generates A$2 billion ($1.53 billion) a year in commission.
The bubbling interest comes as regulators grow increasingly worried about debt levels and the capacity of ordinary households to pay back big loans on expensive houses.
Property price rises, particularly in Sydney and Melbourne, are also showing early signs of easing as authorities tightened restrictions on speculative investor lending.
As banks back off risky lending, Pepper's Australian loan book jumped 36 percent in 2016, far outpacing the banking sector's 6.5 percent credit growth. Experts question whether this growth is sustainable.
"Credit growth is falling as we speak and the housing market is running out of steam," said Hamish Chalmers, who helps manage A$1 billion at Watermark Funds Management. "It seems realistic to think it probably peaked some time in the first or second quarter of this year."
KKR's bid comes more than two years after it bought General Electric Co's Australia and New Zealand consumer lending arm for an equity value of A$1.2 billion. Since renamed Latitude Financial Services, the company offers a similar suite of low-document home lending and credit cards to Pepper.
Industry players said the two firms together will boost KKR's portfolio and create a stronger brand, making it easier for the private equity giant to then offload them at a higher value.
A KKR spokesman in Australia declined to comment.
Pepper trades at a relatively low multiple to the major banks, with a forward price-to-earnings ratio of 9 compared with 14.6 for top mortgage lender, Commonwealth Bank of Australia.
Pepper said in a statement to the Australian Securities Exchange that it had granted KKR exclusive rights to conduct due diligence, and that negotiations were incomplete.
While Pepper is seen exposed to a housing correction and its delinquency rates are already well above the major lenders at 1.6 percent, Australians are seen as good creditors who will cut back elsewhere to meet their mortgage payments.
"If you were to look at the possibility of increased defaults, you'd have to see something to precipitate that, something that we're not seeing on the horizon: For example a sharp rise in the unemployment rate," said Jo Horton, a senior economist at St George Bank.
Reporting by Tom Westbrook and Swati Pandey; Additional reporting by Hanna Paul in BENGALURU; Editing by Richard Pullin and Christopher Cushing