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ASF asks for repo shakeup as ABS market continues to struggle |
Australian Securitisation Forum (ASF) has developed a multi-pronged programme designed to nurse the country’s mortgage market back to health. The programme, which KangaNews understands has already been put before legislators, could have wide-reaching consequences for Australian debt markets if instituted.
Deal flow in the Australian asset-backed securities (ABS) market has continued to be sluggish, although there have been four deals in the past week; most recently, Macquarie launched the second transaction this year through its SMART auto loans vehicle. Adrian Bentley, executive director at Macquarie in Sydney, confirms the latest transaction has a launch size of A$260 million (US$252.72 million) with pricing expected later this week.
Meanwhile, ASF is still in favour of the introduction of a government-backed RMBS market and the trade association also now advocates significant changes to the local repo setup to add liquidity to mortgage securities and prevent further concentration of the market among Australia’s big four banks. Greg Medcraft, ASF’s Sydney-based executive director, says: “It is clear this market needs some measures soon to get us over the hurdle of the next year or so, while the market is fixed for the longer term.”
The most significant short-term moves ASF wants to see relate to the ways Reserve Bank of Australia (RBA) provides liquidity to the system. Medcraft says the most successful emergency liquidity measure internationally is Bank of England’s special liquidity scheme, under which banks can temporarily swap high quality mortgage-backed securities for UK Treasury Bills. ASF wants RBA to adopt the same model, with exchanges conducted under the system potentially open for longer periods than previously expected under conventional repo.
“It is clear that offering liquidity overnight or even for periods up to 12 months is good, but the limitation is that availability is limited depending on the liquidity available to the RBA on the day. RBA should be permitted to offer govvies for triple-A rated RMBS securities for periods up to a year or two, to allow the market to regain shape,” Medcraft explains.
ASF also wants to see RBA’s repo scheme extended and modified, among other things allowing banks to repo their own assets under normal circumstances as well as in a distressed market. It has been widely speculated that a large proportion of the rash of large-sized deals from Australia’s biggest banks in 2008 has been passed round the interbank market, with financial institutions (FIs) effectively holding each others’ balance sheets in the form of repo-eligible term debt.
The extent to which the big four banks have been buying each others’ deals is not certain with, for example, Commonwealth Bank of Australia claiming a 60-strong book for its most recent jumbo transaction. It is clear, though, that the number and size of transactions from the big four has shot up in 2008 in a way that many market participants believe cannot exclusively be explained by a flight to quality – and repo-eligibility – on the part of local fund managers.
Medcraft also points out that since smaller FIs do not have the capacity to hold large tracts of their larger competitors’ term debt they are likely to be at a competitive disadvantage by not being able to repo their own assets.
ASF’s final shorter-term proposal is a significant reduction in the haircuts applied to repoed assets. Medcraft comments: “The RBA’s repo agreement should be brought into line with those elsewhere; the haircut on triple-A RMBS under the existing repo facility is 10 per cent, compared to a level closer to 4 per cent in the UK and across Europe, for instance.”
These measures would only be a short-term fix, though, with Medcraft saying ASF is “still very much in favour of the agency model, which would provide an extra source of government securities as well as providing liquidity on an ongoing basis.” The organisation has already proposed Australia adopt a model akin to that used in Canada, where RMBS securities are packaged with a government wrap to offer security. This differs from the US agency model, allowing ASF to claim that the recent woes of Fannie Mae and Freddie Mac have not negatively impacted the credibility of its proposals.
In addition, ASF wants to widen the investor base for Aussie RMBS in the longer term, including bringing The Future Fund into the investor mix and adding high quality mortgage securities to the circle of assets invested in by Australian Office of Financial Management (AOFM). Government plans to increase sovereign debt issuance and have AOFM re-invest the proceeds in top-rated securities have already been revealed, though it is not known to what extent, if any, the agency will start to buy paper outside its current universe of RBA term deposits.
Neil Hyden, AOFM’s Canberra-based chief executive, has previously told KangaNews that the agency will “look at various classes of investment grade assets,” but there has been speculation its mandate will be restricted to semi-government only or semi and supranational debt. AOFM has so far declined to comment further on what its investment universe might be while its mandate is finalised, although KangaNews understands the end of that process is imminent. However, the agency has also yet to decide whether to release details of that decision in advance of political approval being granted, which will not happen until parliament resumes session on August 26.
Medcraft is confident of movement on ASF’s proposals in 2008. The trade association has made a submission to the Australian government inquiry on competition – which is taking industry soundings and will report in November – and another to the green paper on securities. And objections to wide-scale changes may be growing quieter as the credit crisis shows no sign of abating.
“It is getting increasingly hard to carry on denying that action has to be taken or that the market will ‘return to normal’ unaided, as it is if anything getting worse rather than better,” says Medcraft. “Denial looks more like conscious indifference than anything else – that you know there are problems but potentially stand to benefit from them. The feedback we have got suggests there is definitely momentum building in favour of a new model.”
In other recent ABS deal activity, Macquarie priced A$700 million (US$679.8 million) of low-doc RMBS paper on July 14, Columbus Capital sold a A$208 million RMBS on July 17 and St.George Bank (St.George) brought a A$1.236 billion auto loan backed transaction on July 18 – the largest such trade from an Australian issuer so far in 2008.
The two issuers which have been active earlier this year – Macquarie and St.George – achieved consistent pricing among their latest deals. The Macquarie PUMA transaction priced at 180 basis points over one month BBSW – the same level as the last PUMA RMBS, on June 6. St.George priced the senior AUD tranche of its most recent Crusade ABS at 80 basis points above BBSW and the euro-denominated segment at 120 basis points over Euribor, compared to 70 over and 140 over when it last brought a deal to market on March 25.
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Last Updated ( Monday, 21 July 2008 )
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