Pepper breaks new ground with triple-currency, green-tranched RMBS

Pepper Group (Pepper)’s latest residential mortgage-backed securities (RMBS) transaction featured two tranches backed by green mortgages, one denominated in euros, and also added a US dollar note. The issuer has a firm commitment to issuing further euro-denominated green tranches, which it hopes will unlock European demand as its funding requirement continues to rise.

PRS 22 priced on 30 November, upsizing to A$1.25 billion (US$918.7 million) equivalent from launch volume of A$750 million. Westpac Institutional Bank was arranger as well as Australian dollar lead manager alongside Commonwealth Bank of Australia and National Australia Bank (NAB). The euro note lead managers were Natixis and Standard Chartered Bank, while Citi was sole lead manager for the US dollar denominated tranche.

The list of the transaction’s achievements is long. The green tranches are the first in an Australian nonbank RMBS and the first green securitisation to include foreign-currency notes by any Australian borrower.

Meanwhile, PRS 22 is also the first Australian securitisation deal to include euro and US dollar denominated tranches since the financial crisis according to KangaNews data. Finally, it is Pepper’s largest-ever transaction and largest-ever US dollar tranche.

Pepper’s Sydney-based treasurer, Paul Byrne, says the issuer was particularly pleased to achieve the upsize and price its inaugural green euro notes amid difficult market conditions.

“When we commit to green issuance, we need to ensure we are continuously originating green collateral on the asset side. This will be a major focus for Pepper in 2019.”

Green intentions

Pepper’s green tranches are backed by mortgages over residential properties which comply with energy-efficiency ratings issued by the Australian state and territory governments. Sustainalytics provided a third-party opinion on Pepper’s green-bond framework and a preissuance assurance review on the mortgages supporting the green tranches.

Byrne says the genesis of the transaction was Pepper’s desire to demonstrate its green credentials, to provide industry leadership and to meet investor demand for green RMBS.

“Europe is the most developed market for socially responsible investment and environmental, social and governance considerations, with investors holding and deploying green mandates, green overlays or positive bias towards green paper. A secondary objective was to continue to grow and diversify our investor base, hence the decision to incorporate the inaugural euro and green tranches in PRS 22,” he tells KangaNews.

For Pepper’s euro tranche, 67 per cent was allocated to investors with either dark or light green mandates. Byrne says the Australian green market is less developed but appetite for green bonds was still in evidence, which led to the Australian dollar companion tranche.

The abundance of demand for green product in the euro market in particular has created a marginal pricing advantage for some labelled deals, but Byrne says pricing arbitrage was not the focus for Pepper’s green deal. He notes that the Australian dollar green tranche priced in line with its Australian dollar nongreen senior companion.

Pepper’s focus instead was to promote the green asset class and awareness of the positive impact energy-efficient homes are having on the environment. Byrne says driving this will assist Australia in achieving its target of a net-neutral carbon footprint across its housing stock by 2050.

“Holistically, the more we can do to drive and effect environmental change the better it is for everyone. We would be happy to share our insights and experiences from this transaction with any of our bank or nonbank peers, if they would like to understand the structure and approach we have taken,” says Byrne.

Furthermore, Pepper wants to achieve ongoing investor diversification. Byrne says the issuer has committed to issuing four new euro denominated green RMBS tranches from its PRS programme in 2019.

To enable this, Pepper is intending to launch a green mortgage scheme in 2019, which it hopes will incentivise borrowers to take out loans secured by residential properties which meet the energy-efficiency criteria in Pepper’s green-bond framework.

Byrne tells KangaNews: “When we commit to green issuance, we need to ensure we are continuously originating green collateral on the asset side. This will be a major focus for Pepper in 2019.”

Future approach

Pepper’s commitment to green issuance in 2019 is part of a broader commitment to standardise its transaction structures. The issuer believes this will allow investors to know that the deal and documentation structure of future PRS deals will be the same as PRS 22.

The goal is to allow investor to focus on collateral, Byrne explains. He says this is a natural development as Pepper reaches the critical mass to necessitate a standardised approach to transaction management.

Byrne says investors in the PRS programme can be confident that deals will include a US dollar denominated, scheduled amortisation tranche, a euro denominated green tranche and Australian dollar tranches. “This will allow us to be more efficient when we come to the market and also confirms our commitment to those investors in our green tranches,” he explains.

This strategy follows what has been Pepper’s largest-ever year in securitisation (see chart). With just less than A$4.8 billion equivalent raised, the company has also been by far the largest Australian securitiser in 2018.

Pepper expects further growth in 2019, including adding up to three new securitisation platforms to the existing two – PRS and iPrime. Pepper’s intention is to bring inaugural transactions from its asset-finance platform, its UK nonconforming business and potentially a further issuance from its new second-lien mortgage business in the UK, the purchase of which is expected to close before the New Year according to Byrne.

Byrne says: “We have a sense of the natural level of paper the Australian market can absorb from Pepper. We continue to work to develop our offshore investor base and to bring investor-friendly transactions for those investors to deploy their capital into.”

Source: KangaNews 4 December 2018