Mezzanine demand

Securitisation demand has been particularly strong for lower-rated tranches in 2017. Nonbank issuers discuss the significance of – and robustness of – the mezzanine market.

DAVISON Another positive story in 2017 has been the strength and breadth of demand for mezzanine bonds. Can the issuers characterise the evolution they have seen in this space – where has the new demand come from, why has it emerged and how sustainable will it be?

BARRY The level of demand has been outstanding. We have seen new mezzanine investors come into every transaction we have done, as they get increasingly comfortable with the assets and the performance.

Their business models have changed as well. In the lower-rate environment they have grown funds under management and are looking to deploy capital to stable fixed-income product. Residential mortgage-backed securities (RMBS) comfortably meet these requirements.

We see new demand coming from a combination of family offices, boutiques and larger industry players that continue to grow through superannuation year on year.

AUSTIN Firstmac has also seen new accounts across the junior tranches of our recent RMBS deals. Domestically, we have strong supporters in the mezzanine space and there is demand from offshore accounts too – in particular Japanese investors. I am also led to believe European mezzanine investors would participate if CRD-IV was offered.

This development is a recognition of the yield available on these tranches compared with the structural features and the quality of the credit, as well as the fact that relative value on mezzanine tranches is good compared with other asset classes.

PLOUGHMAN Some firms are creating dedicated high-yield funds to be able to play in this space. We have seen a few funds open specifically to take advantage of this sector.

LAWLER It comes back to the conversation around collateral. Yes, market participants are watching the valuation of the Australian real-estate market but they are broadly comfortable with the structures of the products we are offering relative to the banks. In this context, they view our mezzanine notes as offering safe but higher-yielding returns.

Because these are generally thin tranches, supply is limited. We therefore receive many more enquiries about mezzanine notes within warehouses. Investors are realising either that the notes are not available or, when they are, allocations will be scaled. Therefore, they see coming in at the warehouse level as a way of getting access to mezzanine notes in term bonds – of effectively securing future supply.

MARSDEN There are also some unique technicals in play that are driving demand. Pre-crisis, only the full capital stack was issued in asset-backed securities and nonconforming structures of RMBS. Now, because of the anticipation of more capital trades coming to market from the bank sector, we are seeing a real change in the profile of deal structures – particularly from the nonbank sector.

Seeing more frequent issuance out of the nonconforming sector also leads specialised credit funds to carry out credit work on the structures and the issuers themselves, thus generating interest in the product and particularly in the lower-rated tranches.

Even so, from a relative-investment perspective there is still a fundamental lack of demand for fixed-income product in Australia. We see a divorce between a single-A part of the structure and below, and the triple-As.

RIEDEL Not only have we seen solid demand for junior and mezzanine notes, there is also an emerging sense of investors engaging lower down the capital structure than they have previously. We now see investors bidding across different tranches in the same transaction.

Demand in the mezzanine and junior notes is growing not only due to traditional investors but also due to the emergence of new investors as they try to extract strong overall blended returns by investing in multiple different classes of notes.

LAWLER There is also a group of investors that puts in bids strategically to try to get better outcomes on the tranches they really want. Several investors have been heavily scaled and – understandably – disappointed. In the next deal they have come back and bid across several tranches with the bid on one tranche being contingent on being allocated bonds in another.

Part of the driver is the buoyancy of the market. Several tranches, the A2 tranches for example, are very popular and many investors want to be allocated these bonds.

AUSTIN As to whether demand is sustainable, I have a slight concern around the knock-on effect from the introduction of APS 120, specifically whether the level of mezzanine investment required in warehousing will detract from appetite for term RMBS.

ANDREW MARSDEN

More frequent issuance out of the nonconforming sector leads specialised credit funds to carry out credit work on the structures and the issuers themselves, thus generating interest in the product and particularly in the lower-rated tranches.

ANDREW MARSDEN RESIMAC