Securitisation deal flow steady but sure
Primary market functionality in Australian securitisation is much closer to normal than might have been expected including an orderly flow of deals in the past month, market sources say. Investor sentiment is improving even as the wider impact of COVID-19 on the Australian economy becomes apparent.
First quarter 2020 issuance was on track with the previous year’s volume, nosediving once the COVID-19 crisis escalated in mid-March (see chart 1).
After Firstmac’s A$1 billion (US$685.3 million) Mortgage Funding Trust No.4 Series 1-2020 printed on 27 March, it took more than a month for the next primary securitisation deal to land in the market with the arrival of Liberty Funding’s A$500 million deal on 8 May. The latter deal included a ¥26.3 billion (US$246 million) senior tranche.
In other words, while Q2 volume is tracking at less than half the level of issuance from 2019, the issuance hiatus during the escalation of the COVID-19 crisis effectively ruled out nearly half the period for new deals. Since the resumption of activity, seven transactions have priced (see table) while Metro Finance, Bluestone and Resimac all have outstanding mandates in the market as of 22 June.
Australian securitisation primary issuance (exclucing refinancing), Q2 2020
|Pricing date||Pool name||Issuer||Type||Total volume (A$m)|
|8 May 20||Liberty Series 2020-1||Liberty Financial||Nonconforming RMBS||500|
|12 May 20||La Trobe Financial Capital Markets Trust 2020-1||La Trobe Financial||Nonconforming RMBS||1,250|
|27 May 20||Resimac Triomphe Trust - Premier Series 2020-2||Resimac||Prime RMBS||500|
|5 Jun 20||Columbus Capital Triton 2020-2||Columbus Capital||Prime RMBS||600|
|10 Jun 20||PRS 26||Pepper Group||Nonconforming RMBS||700|
|17 Jun 20||Liberty Series 2020-2||Liberty Financial||Nonconforming RMBS||800|
|18 Jun 20||RedZed Trust STC Series 2020-1||RedZed Lending Solutions||CMBS||300|
Source: KangaNews 18 June 2020
The biggest catalyst for the resumption of deal flow is the Australian Office of Financial Management (AOFM)’s Structured Finance Support Fund (SFSF), which has helped clear a secondary overhang and, at times, stepped up to support new deals with direct investment.
The ability of the Australian securitisation market to bounce back quickly to issuance speaks to its resilience – and more attractive credit spreads – says Fabrice Guesde, head of global structured credit solutions, Asia Pacific at Natixis in Hong Kong. “At first, no one knew how investors would react, or how anyone was going to react – even immediately after the SFSF was announced. Since then, we have seen repricing compared with pre-COVID levels which has resulted in most investors continuing to evaluate and particulate in deals.”
Orderly deal flow
Deals came to market in the May-June period at relatively regular intervals – but arrangers say the spacing has not been deliberate. “The flow of deals is more a function of market conditions,” says Craig Stevens, director, securitisation origination at National Australia Bank in Melbourne. “Issuers have to run their own race but, given the lack of supply from banks – it is all nonbanks at the moment – it just happens to have been spaced out that way.”
Justin Mineeff, executive director, debt markets securitisation, at Commonwealth Bank of Australia in Sydney, says the time to market of securitisation deals helps moderate flow. “Issuers are coming to market with a mandate announcement and providing adequate time for investors to do the credit work. With that visibility, lead manager groups are able to provide advice around when is the right time to access the market,” he explains.
Source: KangaNews 18 June 2020
On the other hand, Mineeff adds that issuers and arrangers have been managing shorter window between launch and pricing. “The market has been receptive but everyone is conscious of the potential for volatility – which is why the window has been a little shorter than what we have traditionally seen,” he tells KangaNews.
Transactions have been able to attract support across the capital stack and, Stevens adds, global relative value has worked in favour of Australian securitisation. However, oversubscription in junior notes has subsided having frequently been in the 6-8 times range before the onset of the crisis. While Stevens says this has not hampered confidence in new deals and should not prevent future flow, it may limit the capacity to upsize.
Paul O’Brien, syndicate, Commonwealth Bank of Australia in Sydney, tells KangaNews investors are slowly gravitating back to mezzanine notes. “On some of the most recent deals the coverage has increased and we expect those ratios across the stack to increase on the coming deals,” he reveals.
Offshore investor bandwidth for Australian dollar securitised product has also remained robust throughout the crisis. O’Brien says there has been no wholesale pull back of the offshore investor base, which he argues is a testament to the quality of the product on offer.
Guesde tells KangaNews that Natixis has even seen participation from international investors that were not frequently seen in Australian securitisation previously – albeit participation is likely still constrained by cross-currency economics.
The new primary flow has exclusively come from the nonbank sector. The last securitisation deal from an authorised deposit-taking institution was a Bank of Queensland refinancing on 16 March, while the only new bank securitisation deal this year was Westpac Banking Corporation’s A$2.75 billion Series 2020-1 WST Trust deal on 24 January (see chart 2).
The SFSF is only available to nonbanks and to ADIs that are unable to access the Reserve Bank of Australia’s term funding facility. This would not necessarily preclude bank RMBS issuance, as by 22 June the AOFM has only directly participated in four new deals – for Firstmac, two of Liberty Financial’s and RedZed Lending Solution’s pricing of commercial mortgage-backed securities.
The AOFM has, where possible, undertaken switch purchases in the secondary market from investors who have committed to supporting primary deals. La Trobe Financial was the first issuer to benefit from this background support to its A$1.25 billion RMBS print on 12 May.
Source: KangaNews 18 June 2020
Following that deal, Martin Barry, chief treasurer and strategy officer at La Trobe Financial in Sydney, told KangaNews the issuer provided regular updates to the AOFM on investor interest in its deal and that this process culminated in no direct government participation being required.
Michael Bath, head of global markets and business strategy at AOFM in Canberra, said in an Australian Securitisation Forum update on the SFSF and forbearance special purpose vehicle that the AOFM was scaled out of La Trobe’s transaction. “We were prepared to invest a significant amount, on top of providing bids for those that did come into the transaction, but as we are instructed by our direction we stepped back as other investors came in.”
Bath went on to explain that the AOFM’s objective is to “assist in price discovery and to provide a wide range of tenor as well as credit rating, but mainly to support investors coming into primary transactions that we have been asked to also support”.
Since it first began switches, on 6 May, the AOFM has bought A$700 million in amortised secondary paper. To date, total investments of the SFSF stand at A$2.4 billion including its warehouse facilities granted and primary participation – leaving plenty of availability in its A$15 billion stated initial capacity.
Stevens says nonbanks will continue to dominate securitisation supply with ADIs likely to fulfil their near-term funding requirements using the TFF and recent deposit inflows. He predicts: “The nonbank pipeline is backed up from the lack of issuance in March and April and we will see those deals come into frame in the next few months.”
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