Foreign-currency funding

Nonbanks are among the largest and most consistent issuers of foreign-currency securitisation in Australia. Deal flow remains patchy, however – although issuers would love to be more active.

CRAIG Foreign-currency issuance is still limited. Peter Riedel, Liberty Financial issued a euro-tranche earlier this year. Why did it all of a sudden work and what future do you see in this route?

RIEDEL A positive confluence of events clearly helped. QE was one factor while the cross-currency basis swap tightened significantly in June and July, which made the euro and Australian dollar tranches cost the same from an overall perspective. This situation has not prevailed for quite some time. We had also just met with euro investors at the global asset-backed securities conference in Barcelona, so to some extent it was really a perfect storm for timing.

European demand for Australian assets is high, although the reality is it is hard to say with any certainty what effect QE tapering might have. Keeping in close contact with investors will help us get a clear sense of this.

The overarching factor, though, is investors continue to seek diversification. Even if more product becomes available in Europe, I don’t think this will reduce the demand for Australian assets.

We continue to monitor the cross-currency basis swap very carefully following our July transaction, and while it has eased a little – a few basis points – it has not widened enough to deter us from our plans to re-engage with euro issuance soon.

Of course, the ultimate cost equation is important for any good risk manager in maintaining the right level of capital and returns.

LAWLER There is a complex dynamic when it comes to issuing foreign-currency tranches. Going to the trouble of structuring a foreign tranche for offshore investors that can only buy their domestic currencies is quite different from issuing Australian dollars to offshore investors. In fact both require considerable time and effort.

The outcome of Brexit for Pepper’s Australian issuance was positive in that asset managers who have historically been inwardly European or UK focused saw this as a catalyst to seek diversification in the face of Brexit uncertainty. Investors that had never before considered Australia have now started to invest.

Brexit was a driver for some of these accounts, because they observed some uncertainty they could mitigate with Australian issuance. But none would have engaged if as an industry we hadn’t been talking to these investors for many years.

BARRY Rates are clearly a key factor, but what is encouraging for us is the volume of transactions that can be executed in offshore currencies. If all the factors Peter Riedel mentions come together again in the next year or so the ability to access deeper markets in size is good for the nonbank sector, particularly with the growth volumes we are all experiencing. This opens up an opportunity in 2018 for issuers like La Trobe Financial.

AUSTIN We haven’t come close to issuing in euros yet because we haven’t wanted to offer CRD-IV. Having said this, it is something we are prepared to provide if demand warrants.

We have worked particularly hard with new and existing accounts in other jurisdictions. Given the fruits of our labour with these investors – in Asia, for example – I would say we are not receiving a level of engagement with euro accounts consistent with the additional cost of CRD-IV. As a result, we haven’t been inclined to issue.

We see the cross-currency swap as still expensive but improving. These factors together mean we may be getting closer to issuing a euro tranche.

LAWLER Price is important. We don’t want to fund our businesses more expensively for the same effort. But the nonbanks around this table have reached a scale where to rely exclusively on Australian investors to support the full extent of our funding would be a challenge. There is a tipping point to consider – what is the right price for diversification into foreign currencies that we’re all prepared to accept?

There is undoubtedly an additional cost to foreign-currency funding. Pepper has issued US dollars for an extended period and we have been keeping a close watch on euros, sterling and other currencies. What we have found over time is sometimes offshore pricing is cheaper and other times it is more expensive, but from an overall cost perspective the liquidity premium is not that high on a blended basis over time.

TODD LAWLER

To rely exclusively on Australian investors to support the full extent of our funding would be a challenge. There is a tipping point to consider – what is the right price for diversification into foreign currencies?

TODD LAWLER PEPPER