New Zealand securitisation waking up
New Zealand’s securitisation market has traditionally been underdeveloped, with limited issuance giving little incentive for institutional investors to devote analyst resources to the asset class. Nonbanks are benefiting from market growth, however – and regulatory change could be the catalyst for a further leap forward.
Laurence Davison Head of Content and Editor KANGANEWS
Chris Rich Staff Writer KANGANEWS
Other than scale, arguably the biggest difference between the New Zealand securitisation market and its Australian equivalent is the source of issuance. Nonbanks regularly provide around half of all Australian issuance – a figure which looks impressive given these issuers’ small, albeit growing, share of the mortgage market. New Zealand securitisation, however, has been a pure nonbank market for several years (see chart 1).
The uptick in nonbank securitisation issuance in 2019 should come as no surprise, as the New Zealand market is providing a similar opportunity set to nonbank lenders as has emerged in Australia. In short, a decade of increasingly onerous regulation – especially when it comes to capital – is making various types of noncore lending less appealing to local banks.
New Zealand nonbanks have securitised mortgage, auto-loan and credit-card assets in roughly equal proportions since 2017 (see chart 2). The banking sector’s prudential regulator, the Reserve Bank of New Zealand (RBNZ), has helped open the door to market growth for nonbank mortgage lenders.
“The RBNZ’s macroprudential rules regarding investment and loan-to-value-ratio restrictions were relaxed in 2018. Previously these bifurcated the market, with bank prime mortgages being separate to everything else. But now, in theory, more opportunities should be open to the nonbank sector,” Andrew Marsden, Sydney-based general manager, treasury and securitisation at Resimac, told KangaNews after the issuer’s latest residential mortgage-backed securities (RMBS) issuance in New Zealand in March 2019.
The story is the same for nonmortgage assets. Eva Zileli, Melbourne-based treasurer at Latitude Financial Services – which debuted in the New Zealand securitisation market with a credit-card-backed transaction in December 2018 – suggests that the nonbank opportunity set is also growing fast outside the mortgage space.
A key consideration for nonbanks active in New Zealand will be access to a funding market of sufficient scale to support business growth. Issuers say they are adequately supported by local warehouse provision. They are also seeing signs of increasing investor engagement in the public securitisation market.
New Zealand’s most active securitiser is flexigroup, which has issued NZ$812 million (US$512 million) in aggregate across five transactions since the start of 2017. The firm’s Sydney-based group treasurer, Michael Malone, reveals that its most recent asset-backed securities (ABS) issue saw first-time participation from some New Zealand-based institutional investors. flexigroup met 15 investors on the roadshow preceding the NZ$300 million pricing of the Q Card Trust deal in August, of which 13 participated in the transaction.
“There is growing evidence of asset managers in New Zealand further understanding securitisation structures, and doing the due diligence and credit work necessary to enable them to become securitisation investors,” Malone tells KangaNews. “We are optimistic that we will see even more investors next time we bring the Q Card programme to market.”
There is also a ready-made audience for New Zealand securitisation in the form of the specialist institutional investor base in Australia. Many of the names issuing securitisation in New Zealand – including Avanti Finance (Avanti), Eclipx Group, flexigroup and Resimac – are active in Australia and are therefore familiar to the buy side in that jurisdiction. The Australian real-money buyer base for nonbank securitisation is itself relatively small but it is sufficient to provide a significant demand boost to New Zealand deals.
Avanti has printed New Zealand RMBS deals in 2018 and 2019 with demand from Australia and New Zealand. Paul Jamieson, Avanti’s Auckland-based group treasurer, says: “We have seen over the years that a number of investors in these structures are in Australia – and this is not just the case for Avanti but for other issuers too. The interest in New Zealand securitisation is almost as great for Australian investors as it is in New Zealand.”
Even so, New Zealand nonbank securitisation has been more a case of incremental evolution than a quantum leap forward. Deal size has grown somewhat but transactions are still typically in the NZ$200-300 million range. Issuance margins have not tightened appreciably, reliably coming in at 110-130 basis points over bank bills for the past two-and-a-half years.
To some extent this reflects the growth opportunity for nonbank lending, which is itself a gradual process. Banks’ willingness to lend has been sticky in various sectors in New Zealand. For instance, corporate borrowers report loan pricing remaining competitive long after many expected capital rules to reduce banks’ price competitiveness. In the same way, while the opportunity for mortgage and consumer lending is definitely real for nonbanks it appears to be opening up gradually.
The pace of growth could be set for a step change on the back of further tightening of New Zealand bank capital standards. The RBNZ proposed late in 2018 that capital requirements on the local major banks be increased to 18 per cent of risk-weighted assets, and that this capital come in common-equity tier-one format. This is a substantial increment on existing capital requirements and nonbanks believe it will make noncore business less profitable, and thus less appealing, for the banks.
“There is a clear link between RBNZ capital requirements and market opportunities,” Zileli explains. “The increasing capital requirements for banks in New Zealand make certain businesses more attractive than they would have been previously. In particular, this means businesses that are not core for banks such as credit cards and personal lending.”
The same is true – perhaps even more so – in the mortgage space. Jamieson tells KangaNews there is a clear comparison for the potential path of nonbank growth. “Nonbank lending is more accepted in Australia than New Zealand and I think we are going to see the pattern replicate in New Zealand,” he tells KangaNews. “I think there is opportunity for the RBNZ capital changes and other market dynamics to widen the nonbank space.”
In this environment, a larger and more price-competitive New Zealand dollar securitisation market could only be a boon for local nonbanks. Another regulatory development, this one still in the pipeline, could provide a boon for all issuers – even though it is designed specifically for the bank sector.
The RBNZ has been working for some time on its residential mortgage obligation (RMO) proposal. With no established market for bank RMBS in New Zealand, the reserve bank has focused on the volume of internal RMBS the major banks in particular hold as liquid assets. It is concerned about the scale of its obligation to accept these securities for repo and wants to catalyse a public market for mortgage-backed paper to assist with price discovery and liquidity.
Developing the RMO is a work in progress and opinions are divided on how successful it will be as a tool for persuading banks to issue RMBS. There is some expectation, however, that local banks will in time become securitisation issuers for funding purposes. Far from being unwanted competition for investor dollars, New Zealand nonbanks broadly welcome the idea of a large source of new supply.
Their hope is that a bank RMBS – or RMO – market with regular supply of benchmark deals should induce local institutional investors to devote analytical resources to the asset class that perhaps cannot be justified by sporadic nonbank issuance alone.
For instance, speaking at the KangaNews New Zealand Debt Capital Markets Summit in Auckland in August, Resimac’s director, treasury and securitisation, Debbie Long, said: “We have spoken to investors that believe [the RMO] could deepen the market in New Zealand. Investor mandates could broaden, and this would allow them to grow their teams and boost the securitisation market.”
Bianca Spata, head of group funding at flexigroup in Sydney, confirms that the RMO was a frequent talking point on the issuer’s most recent roadshow in New Zealand. flexigroup also views the prospect of bank RMBS issuance as a positive development for the New Zealand securitisation market as a whole.
“The fact that we will have banks executing RMBS transactions will mean much higher volume of securitised paper in the New Zealand market. We have seen investors that perhaps didn’t have a Kiwi ABS mandate before showing an interest in the space,” Spata comments. “We see the RMO as an opportunity to build out securitisation – and our own transactions – in the New Zealand market, as and when the banks start issuing RMBS.”