Securitisation spark

The Australian securitisation sector was read its last rites at the start of this year, but there are signs that even this very niche part of the banking industry is now following the rest of the economy upwards.

It’s been a good couple of weeks for the bankers all around the country who specialise in securitisation. In general terms, this involves taking a pool of intangible assets – typically home mortgages or car and equipment loans – and bundling them up into bonds, which are sold to investors. The loan repayments over time will cover the issuers’ interest and capital commitments to investors in these securities.

These are not the deals that got the US into so much strife. Our banks have been far more cautious than their US and European counterparts and mortgagees here are better risks. So it is that a few recent good securitisation deals are being interpreted as signs that even this very niche part of the banking industry is now following the rest of the economy upwards.

Australian residential mortgage-backed securities (RMBS) were always a good bet: a report from ratings agency Moody’s shows the third quarter performance of prime and "non-conforming” RMBS assets have declined markedly for their high point in January this year. And on a world scale, these were low numbers in any case.

That said, there has been a degree of caution among all investors, to the point that the non-bank mortgage origination industry was being given its last rites at the start of the year. The May Federal Budget saw $8 billion allocated to support the industry, and this has recently run out. 

The government’s original $8 billion, delivered via the Australian Office of Financial Management, supported five non-major Australian banks, four building societies and credit unions, and four non-ADI lenders, allowing them to raise almost $11.4 billion in funding.

The final piece of the original $8 billion held by the AOFM, over $200 million, was gratefully taken up by the Brisbane based lender FirstMac in a mortgage securitisation deal last week – its third such effort. What was different this time is that the transaction was initially launched at $400 million but was increased to $470 million, following greater than anticipated investor bids.

Further, only $215 million was needed from the AOFM as a cornerstone investor, with $255 million provided by a group of large wholesale investors.

Given this good news, the Federal Government has just cleared the AOFM to pump in a second batch of $8 billion.

In fact, some parts of the industry are moving out of intensive care and into the recovery ward, and they’re bringing a degree of innovation to what has been a tried and true, if slightly moribund, part of the banking sector.

Two cases stand out In mid-November, ME Bank was taken to market by National Australia Bank with the first RMBS that used a class of redeemable and convertible bonds to attract a wider range of investors.  And it apparently worked – without AOFM backing.

NAB said in a media release that "investor demand has pushed the original transaction volume up from $500 million to over $780 million”. Foreign investor participation in the non-redeemable tranche was 16 per cent.

John Barry, the head of securitisation in NAB’s wholesale banking business, is understandably bullish about that deal, and the market in general. "This half, we’ve seen a number of really positive developments in the RMBS market. The non-AOFM activity has been very significant (over $3 billion) with real money investors once again investing in the longer weighted average life tranches,” he says.

And he’s not surprised by this trend based on what he sees as strong fundamentals and the "compelling” relative value proposition of Aussie RMBS. "Collateral performance is second to none, and the supply/demand technicals have improved too. For example, there is not the same level of supply overhang in the secondary market. But what has been surprised some in the market has been the pace of the recovery. Few expected investor demand to return so quickly and the steady spread contraction for non-AOFM issues has been encouraging, as has the increased participation from offshore investors.”

Then, fast forward to this past week, where we saw Bendigo & Adelaide Bank upsize its new RMBS deal, known as the TORRENS Series 2009-3 Trust, by $500 million to $1 billion. More interestingly, the top tranche was sold to what the bank said was "a diverse range of investors”, with 41 per cent going to European investors.

The bank was equally quick to make the point of that this was the first RMBS from a regional bank without the support of the AOFM for 2009, and the fourth RMBS deal in absolute terms to go unaided by AOFM money.

OK, so a couple of recent deals have been done by non-major banks without AOFM support, which itself is an achievement of sorts. Not everyone is ecstatic, however.

"It’s great to see but we won’t be popping the champagne corks quite yet,” says Alex Sell, chief operating officer of the Australian Securitisation Forum, a peak industry body. "[AOFM support] is working as far as it’s enabling smaller issuers to continue to issue, and it’s keeping them alive for the medium to long term, [but] we note that those deals have relatively high levels of subordination, which may have been necessary to get them away.”

He suggests that the amount retained by the issuer is more than is historically typical. The Bendigo Bank deal saw $85 million – or 8.5 per cent of the paper – kept on balance sheet. That is, the issuers have kept more skin in the game than they might have once needed.

Still, for second tier banks, these have been good deals. "The capital benefits of getting these assets off balance sheet are considerably bigger than they would be for a major bank under current rules,” says Sell. "We are seeing the pricing coming in, and when they get to around 100 [basis points, or 1 per cent] over that would represent a viable alternative for most issuers – especially ADI issuers, but at the moment is too wide of senior unsecured for issuers, particularly the major issuers.”

Sell adds that the industry is also very worried about the impact on mortgage securitisations posed by Prudential Standard APS 210 – covering bank liquidity – as the banks have typically been large buyers of each other’s RMBS. Under APRA’s interpretation, RMBS assets will no longer constitute "liquid assets” so investor appetite will be lessened.

Still, the AOFM is now in the market again as a "cornerstone investor” for mortgage securitisation deals. Ostensibly, the government line is that this will increase competition in the housing loan market by allowing non-bank mortgage originators to improve their funding costs. In reality, it’s a drop in the ocean, and the big four banks have in fact increased their stranglehold on the mortgage market.

And, to cap off the run of good news for the struggling mortgage industry, Westpac’s lone "mating call”, raising its mortgage rates by 45 basis points on Tuesday and almost being left stranded (ANZ went part-way there), may also have given the next tier of lenders an unexpected free kick.

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