Australian nonbanks' song remains the same

Every year, KangaNews hosts Australia’s leading nonbank lenders at a sector roundtable discussion – supported since 2019 by Natixis. In keeping with the unique circumstances of 2020, this year’s roundtable was conducted via videoconference. While market conditions have changed dramatically in the past 12 months, the sector is able to tell the same story of solid funding foundations and sound credit quality.

  • James Austin Chief Financial Officer FIRSTMAC
  • Martin Barry Chief Financial Officer LA TROBE FINANCIAL
  • Fabrice Guesde Head of Global Structured Credit, Asia Pacific NATIXIS
  • Andrew Marsden General Manager, Treasury and Securitisation RESIMAC
  • Peter Riedel Chief Financial Officer LIBERTY FINANCIAL
  • Paul Scanlon Chief Executive PRIME CAPITAL
  • Andrew Twyford Group Treasurer PEPPER GROUP
  • Matt Zaunmayr Deputy Editor KANGANEWS

Zaunmayr Looking back to the escalation of the COVID-19 crisis in March, perhaps a good place to start would be by reviewing how nonbank balance sheets and lending books were set up to provide the resilience needed to deal with this sort of exogenous shock.

AUSTIN When you are going into a crisis it is too late to start making your balance sheet resilient – it either is at that point or it is not. We repositioned our balance sheet over the 10 years since the financial crisis to have a majority of long-term funding in our profile.

We have a cap that means we cannot allow short-term funding to be more than one-third of our balance sheet. We have also lengthened our funding to seven-year, 10 per cent clean-ups from the typical five-year, 20 per cent clean-up.

We established warehouse relationships that we thought would be less flighty in a crisis – which was something we saw during the financial crisis. Coupled with this was our approach to mezzanine funding in warehouses, where we take funding for two years rather than one. We fully draw the mezzanine piece and, while there is cost to this, it means we have term funding and a well-positioned balance sheet.

All in all, we were in a good position at the onset of the crisis in March. We managed to do a transaction late that month and were lucky that a lot of the engagement had taken place before the escalation of the crisis. It was still the most difficult deal we have ever done – the book came together and fell apart four times before we finally printed – but it was good to get it done, ultimately with a few long-term partners. 

The AOFM [Australian Office of Financial Management] came into this deal within 24 hours of the structured finance support fund (SFSF) being approved. This allowed us to fill some small holes in the mezzanine piece and to upsize the deal to A$1 billion (US$728.4 million), which was a good result.

“We have been quite surprised at how positively the Australian dollar market has rebounded. It has been resilient and demand from domestic and offshore investors has been strong. It takes a bit more time to execute deals at the moment but we have been happy to see significant volume of transactions.”

BARRY A lot of lessons were learned after the financial crisis and I am sure the balance-sheet strength of every nonbank here has improved markedly since then. La Trobe Financial has been operating since 1952 and has seen many business cycles. Under our business and broader planning model we have always maintained roughly 12 months of forward-funding capacity and a minimum of A$50 million free capital on any given day, while we have more than A$457 million of regulatory and shock-absorber capital across the group.

We have also had unwavering support in place from our panel of eight banks, which includes domestic and international lenders, providing broad funding depth and diversity of around A$3 billion. Our A$5 billion retail credit fund provides additional upside capacity.

Consequently, we had no pressing funding or liquidity needs when the crisis unfolded in March and we could ride out the storm. We continued our operations and remained open throughout the period, generating investment-grade asset originations of around A$1.8 billion in the last quarter of our financial year, with closed settled loans of around A$1.2 billion. These figures represent a 42 per cent and a 20 per cent decline from pre-COVID-19 peak volume.

SCANLON We are a relative newcomer and our funding is primarily in warehouses. We have continued to accumulate loans in these throughout the COVID-19 period. Our operations continued but there was certainly a lot more communication required with our funding partners. They provided a lot of support and information for us as well.

It has been a different experience with the mezzanine piece for us. We do not have a lot of mezzanine funding but the conversations we had about potential incoming investors were all paused.

Nonetheless, the origination side has been our primary ongoing focus – particularly looking at techniques to continue valuations and maintain origination. This has been challenging, particularly when we are unable to move around and meet physically.

RIEDEL Liberty Financial’s balance sheet and funding position is long-established and diverse, and therefore durable. We manage our liquidity position so available funding does not fall below 50 per cent of total funding limits. Going into this crisis, we had nearly A$3 billion of capacity in our wholesale facilities – which is a significant level of capacity to support new customer acquisition.

We all know well that funding markets are not always stable and do not always behave in a linear fashion, so it is important to have sufficient capital to support customers during periods of uncertainty.

Once a stress period has started it is almost impossible rapidly to adjust risk-management settings without negatively affecting your business model. Liberty’s capital, funding and liquidity strategy has proven effective over a long time and especially in times of economic and market volatility. Robust capitalisation, conservative leverage with very little mezzanine funding and long-term stable financing partnerships have been the cornerstones of building funding durability. We came into this period in a strong liquidity position and this continues to be the case.

“Robust capitalisation, conservative leverage with very little mezzanine funding and long-term stable financing partnerships have been the cornerstones of building funding durability. We came into this period in a strong liquidity position and this continues to be the case.”

Maintaining investor contact under pandemic conditions

Australian nonbank issuers have been among the nation’s most active when it comes to global investor engagement. With international travel off the cards for the foreseeable future, issuers’ investor-relations approach had to adapt.

ZAUNMAYR How has investor relations changed in the COVID-19 era, especially when in-person updates and roadshows are impossible?

GUESDE I have been amazed at how all players in the market, around the world, have adjusted to a new way of doing things. If you had told me a year ago that we would be having this conversation in the way we are now and it would all go smoothly I would have had doubts.

We have seen logistics slow down some processes in Japan, but appetite remains. Some areas have required rapid change, such as trading – where market users were still using stamps. This is something that cannot be done at home! Processes had to be addressed and changed.

Investors generally have been able to adjust quickly, but I think in the long run it is not sustainable to work like this. We have had long talks with some issuers on video and it does work, but there is no replacement for face-to-face meetings.

Zaunmayr How does a crisis like COVID-19 affect day-to-day management in the treasury function, especially with regard to priorities and areas of focus?

MARSDEN The focus of our organisation has always been on liability management. Resimac is a listed entity so there is a more constant desire from analysts and shareholders for us to demonstrate resilience in the business.

It is important that we can show our continued ability to lend throughout challenging operating environments. Late February to early June this year was probably one of the toughest periods we have experienced. Even so, we have continued to support new business. This has been an important message to convey given people have long memories of nonbanks not being able to maintain presence and lending volume through the financial crisis.

We have shored up our funding and capital positions and have been testing our ability to bring duration into our funding mix. This is executed through RMBS [residential mortgage-backed securities] and, by and large, the market has been supportive of the nonbank sector’s requirements. Investors generally acknowledge the way nonbanks have managed the credit and forbearance situations through this period.

I would not say it is back to business as usual. But the sector has done well in the sense of developing the RMBS market in light of the new environment and the lack of bank paper.

TWYFORD One thing I want to highlight is that management of a crisis like this is about writing the right volume. We are moving through dynamic credit environments and maintenance of volume is very important. We have made appropriate adjustments to our credit appetite as we have moved through this year, which fits alongside the management of liquidity risk.

The other key aspect is maintaining confidence in the go-forward position of our funding. Being well positioned includes an ability to maintain momentum in funding markets so we can come out the other side in as strong a position as we went in.

We are maintaining the confidence of our investor base, in warehouse facilities and term markets, to be able to maintain the growth capacity of the company and to take advantage of any opportunities that come to the sector. We see upside opportunities coming out of this situation and want to be able to take advantage.

“Transparency has been required and helpful during this period. There have been some challenges, though. It is easy to account for formal enquiries and applications for support, but we are also asked for information on informal customer requests. This is much more difficult to record and track real data on.”


Zaunmayr How well has book quality stacked up compared with what lenders had modelled and what they expected at the start of the crisis?

RIEDEL It was challenging to anticipate the consequences of this crisis because its duration and impact were so uncertain. We are still learning every day. What we know is that the number of affected customers has reduced since the pandemic began.

At the end of April, we had provided around 11 per cent of our customers with some kind of payment arrangement. As at the end of August, 3 per cent of our customers remain on reduced-repayment arrangements.

Liberty’s approach in supporting customers through this crisis is completely different from the major banks. For instance, only 0.7 per cent of our customers received a payment holiday in contrast to the banking sector at 10-15 per cent.

Also, establishing an appropriate repayment rate with customers and working with them to improve the repayment rate over time is critical to achieving the dual objective of supporting our customers and maintaining a performing portfolio. For us, the repayment rate from customers affected by COVID-19 has increased to about 85 per cent from about 60 per cent.

The two measures of a falling proportion of affected customers and an increasing repayment rate from those that are affected tells us our customers are in a significantly improved position today.

Another point worth making is that, so far, we have not seen an increase in new support for customers in Victoria since the second lockdown. We are still only three weeks in, though, so we are watching and monitoring closely.

BARRY What constituted acceptable credit significantly changed once the crisis affected employment numbers in specific industries, such as tourism and hospitality. Before COVID-19, for instance, we would have lent to an airline pilot every day of the week.

La Trobe Financial hardship numbers peaked at around 17 per cent in mid-April and we are down to just more than 5 per cent in July with an expected further reduction to around 3.5 per cent in August. We expect a slight uptick in the next period from September to December, due to the Victorian stage-four re-lockdown. But overall we expect hardship to reduce further between now and the end of the calendar year.

The key difference in Australia is the various support packages available. There is JobKeeper, JobSeeker and early access to superannuation, all of which have helped bridge the gap for customers facing repayment difficulties.

We are seeing a sector-wide improvement in the level of hardship compared with other jurisdictions, including the UK and US. In the UK, hardship was around 30 per cent and in the US around 20 per cent. This tells us the support measures in Australia have clearly worked. The the AOFM’s forbearance special-purpose vehicle (FSPV) has also provided extra reassurance to investors.

Despite all this, there is talk about a cliff-edge event approaching as some of the support packages are unwound. But the federal government appears to have a preference for phasing out its support over an extended period while maintaining it for specifically affected sectors – which means this cliff won’t necessarily come. We are optimistic there will be a rebound in 2021 as evidenced by increased consumer saving rates.

Zaunmayr There is a lot of discussion about what happens to the economy, and thus asset quality, as and when government support expires. How are investors thinking about this in the context of the nonbank sector?

GUESDE We talk to a lot of investors and there is a high level of engagement with the situation. We have come from a very low level of losses so there is a huge buffer in place while excess spread is quite high for nonbanks. Australia also had a soft landing from the peak of the housing market in recent years. There are a lot of positive factors for investors.

Securitisation structures are super resilient so there are not many questions around them. It is more a question of pricing. The market is repricing at the moment but investors are there.

We are even seeing investors in some deals going lower down in the capital structure than they have previously – taking more risk. In a low-rate environment, investors are looking for the best risk-adjusted returns they can find. An issuer only has to add 20-30 basis points to a deal and it will find investors, so I do not think they need to be worried about a cliff event.

What we need to realise about this crisis is that the situation is the same everywhere. It is easy to compare countries and how they have reacted, which makes the situation unique.

“We are maintaining the confidence of our investor base, in warehouse facilities and term markets, to be able to maintain the growth capacity of the company. We see upside opportunities coming out of this situation and want to be able to take advantage.”

BARRY On a relative basis, Australia and New Zealand have performed much better in this crisis than the rest of the world – notwithstanding the headlines we see in the media every day. Investors realised early on that Australian assets would perform better than expected.

Our credit underwriting has been good and, at conservative loan-to-value ratios [LVRs] with federal-government support still in place, we believe Australia stands out as a safe-harbour investment on a relative basis. There are a lot of questions on how the situation in Victoria will evolve, but I think investors can see support is there and that the economy can rebound in 2021.

SCANLON The market conversations we have are really about how uncertain the future is, in the sense that we are benefiting from a large level of government stimulus in the Australian economy. This can continue for a long time, but everyone’s forecasts are based around there being a vaccine as a future game-changer. None of us are medical practitioners and yet we have to take a view on how soon a vaccine comes. This shapes the view on how long government support needs to last.

TWYFORD Our banking partners in the UK have noted a couple of potential challenges are feeding into investor’s minds in respect to UK assets. They have the employment furlough scheme running off as well as the end of their payment holidays, both around the end of Q3 or start of Q4.

Australian regulators extending softer views on bank capital treatment of deferred loans through to Q1 next year can be expected to result in a more controlled forbearance roll-off in Australia. It is much less likely, therefore, that we will experience a cliff event.

When we walk investors through this they appear to appreciate the difference. There are unknowns to play out in the Australian economy, but Australia appears well positioned in comparison with other jurisdictions.

AUSTIN There is a lot of alignment between the government and the regulator. We have been contacted by ASIC [Australian Securities and Investments Commission] because it wants to understand our approach to hardship, our discussions with borrowers and how we are doing everything possible to keep borrowers in their homes.

This is a strong indication that ASIC does not want to see any foreclosures happening. There is alignment with support programmes, to try to smooth out the unwind of support so we see anything but a cliff.

MARSDEN All of this plays into the relative strength of the Australian story on health and the response of government at federal and state level, as well as regulators and industry.

We are starting to re-engage with our US investors and I know there is growing concern around the November election there. Looking outwards, Australia is a robust story given the uncertainties and unknowns in global markets.

Guesde Something quite unexpected has been the level of CPRs [conditional prepayment rates] we are seeing in structures. We thought these would be much lower but they have held up well. What have been the contributing factors?

AUSTIN Saying they have held up well is probably an understatement. CPRs have massively overshot expectations. Everyone expected these to go to very low single digits but ours climbed past 30 per cent from a pre-crisis average of around 18 per cent.

This has been caused by major banks offering very attractive two-year fixed-rate mortgage deals and cash-back offers. We do not want to lose our customers and are increasing our retention efforts, but we still view this development as positive. It means the banks want these customers, which in turn indicates that they are still quality customers and there is no concern on house prices. Competition is alive and well at a time when demand for finance is a bit softer, in other words.

MARSDEN We have had a similar experience, particularly in our prime mortgage book. There is heightened competition in the prime origination market, driven by the major banks. We think this is reflective of the underlying strength of the primary sector of the economy – particularly with salaried borrowers who have not been directly affected by the economic shutdown.

The payment buffers in our prime book have increased to 40 months from 35 over the last four months as customers make additional payments against their debt. One consequence of a lockdown is people having more disposable income, which has not been fully recognised when talking about COVID-19 forbearance challenges.

RIEDEL If we are comparing the financial crisis with this pandemic, the economic factors are resulting in a completely different experience for the customer. In 2008, mortgage rates were increasing and peaked north of 10 per cent – which created significant affordability stress for affected customers. Today, mortgage rates are 2-3 per cent and have been falling while most borrowers’ affordability was assessed at 7.5 per cent.

As such, there is a significant level of resilience built into the system notwithstanding customers being affected by income loss. We are seeing that, even if a customer is affected, most have generated resilience in their personal balance sheets to get through this period.

BARRY We have not experienced any elevation in prepayment speeds.

Keeping warehouses stocked

One of the biggest funding challenges for nonbanks during the financial crisis was the retreat of warehouse providers from the Australian market. Liquidity appears to have held up rather better this time around.

ZAUNMAYR Has there been any change in warehouse relationships so far this year?

SCANLON We are certainly talking more. A lot of work gets done by all parties to set up a funding programme and, once they are established, it can often turn into the business as usual of reporting. But now there is a lot more ongoing communication.

This has been really good. Our funding partners have been great to work with and have given us valuable information on credit and origination markets in exchange for our extra reporting. Everyone is looking for more information at the moment and we are part of this chain as well as a beneficiary.

Banks have been under a lot of regulatory pressure to beef up their capital bases and be more liquid. They are now being called on to rescue and support the economy, and they are flush with liquidity. The focus now is on price.


Zaunmayr How are issuers thinking about best practice for disclosure of hardship and other data in this period? Has a level of consistency in reporting evolved?

TWYFORD It is probably better described as transparency than consistency, in the sense that I do not think a set format or description for how reporting is to be completed has been established or sought. In other words, it is not about how information is reported but a consistency of desire to make sure investors and banks are getting all the information they are looking for.

We have tried to be as detailed and transparent as we possibly can be with the information we have. We have also been diligent in answering any additional questions investors have, as well as providing weekly updates to our warehouse providers. We are open to any investors that would like more frequent updates – not all of them want this but some are appreciative of it. As a general statement, we have not heard negative feedback, across the board, around the level of transparency provided by any issuer in the industry.

BARRY We have provided twice-monthly updates on hardship throughout this period and will continue to offer consistent reporting. Our view is that issuers have an obligation to be prompt and consistent in reporting – and the investors we have spoken to are unambiguous on this front.

SCANLON Transparency has been required and helpful during this period. There have been some challenges, though. It is easy to account for formal enquiries and applications for support, but we are also asked for information regarding informal customer requests. This is much more difficult to record and track real data on.

“We have continued to support new business. This has been an important message to convey given people have long memories of nonbanks not being able to maintain presence and lending volume through the financial crisis.”


Zaunmayr How has the global securitisation market performed in the COVID-19 era so far, and how does Australia compare?

GUESDE Overall figures for global issuance show decreased volume in the first half of 2020 compared with 2019, but only by 20 per cent. There are a lot of differences by region, though.

China is a huge market and its issuance volume is almost flat compared with last year. This means the rest of the world has come down more significantly. Issuance in the US is down by some 30 per cent, in Europe it is around 25 per cent down and in Australia the market was around 42 per cent down in the first half.

There are a variety reasons for this slowdown. Australia of course has a specific situation under which ADIs [authorised deposit-taking institutions] have not issued. This accounts for most of the decline in issuance. Transaction volume has actually been quite resilient in the nonbank sector.

The CLO [collateralised loan obligation] market is a useful benchmark because it is in some ways the only ‘pure’ securitisation market – in the sense that banks are not as active as investors. On a year-on-year basis, CLO issuance volume is down by 46 per cent.

So volume is definitely down overall. We expect it to continue to pick up in the second half of the year, though, and think at the end of the year it will only be 25-30 per cent down.

Pricing has widened virtually across all markets and asset classes, by on average 20-30 basis points. We saw the largest increase in pricing in March – CLO margins went to around 275 basis points from 125 basis points. Pricing has recovered significantly since then, however.

We have been quite surprised at how positively the Australian dollar market has rebounded. It has been resilient and demand from domestic and offshore investors has been strong. It takes a bit more time to execute deals at the moment but we have been happy to see significant volume of transactions in the primary market.

Comparing the COVID-19 crisis with the 2008 financial crisis, a key point is that during the financial crisis it was the mortgage-backed market as a whole that scared people. It is a different story this time around and RMBS is proving to be some of the most resilient assets.

Introducing the FSPV

The next stage of government support for the nonbank sector is the Australian Office of Financial Management (AOFM)’s forbearance special purpose vehicle (FSPV). Issuers welcome its role as a backup but say they hope not to have to draw funds.

ZAUNMAYR How do issuers expect to interact with the FSPV? It has been described as a backstop by some issuers and analysts, but what conditions might trigger a need to access the fund and how likely are they to occur?

MARSDEN For our sector particularly, the FSPV provides an element of confidence on the basis that it is a backstop if there is a prolonged impact from forbearance exposure through payment deferrals. I do not think any of Resimac’s structures will require it, though.

AUSTIN We completed a trade in early July and in the lead up completed a lot of Zoom calls with investors. Questions around the FSPV came up in just about every call – there is a lot of interest in it.
The mere fact it is there provides confidence to the market. We will not be using it but it is a good thing for the industry. Offshore investors may be a little more distant and not have the full details of what is going on in the market. In this context, it is very positive if they know a facility such as this is available.

RIEDEL Would any investors have declined to participate in the Firstmac deal if it were not for the existence of the FSPV?

AUSTIN I don’t think so. The FSPV was not operational at the time and this did not stop investors coming into the deal. A lot of the questions were from investors in the UK, which probably speaks to their experience of this crisis.

ZAUNMAYR Are there any other issuer perspectives on the FSPV?

SCANLON We had a certain amount of tension in deciding whether or not we should sign up for FSPV eligibility.

As the manager of our programmes we thought it was absolutely the right thing to do to ensure those programmes had the facility available to them. However, as an originator to these programmes we did not want to use the facility. We have reconciled this tension by applying for FSPV eligibility but so far have not used it.

BARRY The AOFM put the facility in place very quickly and should be commended for doing so. It has been a very fast implementation and it is pleasing to see the industry, led by the Australian Securitisation Forum, come together to work through the various documentation and get this outcome.

The FSPV has been a global-leading initiative, which is unparalleled. It has given investors further impetus to participate and is very welcome. As we have seen a healthy recovery in hardship levels in our portfolios, we do not anticipate drawing on the FSPV. But we will remain engaged with the AOFM and we are FSPV-eligible.

In the unlikely event hardship became greater than, say, 30 per cent, we would consider the merits of formally drawing.

This is based on our internal modelling and on what rating agencies have said about Australian residential mortgage-backed security structures being robust and able to withstand a high level of non-paying loans. Things would need to get a lot worse for many of the nonbanks to draw on the facility.

“I think, with pricing in all sectors crunching in, it is probably only a matter of time before there is a step down in margin. ADI issuance will remain low and the bank term-funding facility may be extended and even tightened.”

Zaunmayr AOFM support has been crucial. Its role has evolved from providing direct support in primary and secondary markets to warehouse investment and now the FSPV. How do issuers assess this evolution?

MARSDEN The speed and responsiveness of the AOFM in March was crucial. I summarise the AOFM’s role as having effectively shored up confidence and injected positive sentiment into the market. By this I mean the broader wholesale lending market as well as securitisation.

The offshore banks with which we have balance-sheet relationships derived a lot of comfort from the mere backstop presence of the AOFM, in secondary markets and through the FSPV. We should also not underestimate the effectiveness of the AOFM’s initial participation in the secondary market, because issues here could have caused real liquidity problems for the sector. But we saw the AOFM executing secondary-market switches. This allowed primary issuance to restart within the confines of a very challenging time in April and May.

We were making contingencies for primary markets to stay closed for 4-6 months but I genuinely believe the AOFM’s participation kickstarted the market much earlier than anyone expected.

BARRY It became evident through April and into May that global investors were comfortable – first with the health outcomes in Australia and second with the quality of Australian mortgage collateral. Diverse granular mortgages, low LVRs and relatively low levels of hardship contributed to this. The AOFM’s support gave further confidence for investors to re-enter the market.

Accordingly, we were able to proceed with a A$1.25 billion RMBS transaction in May – the first to price without direct AOFM support since the crisis began. We were fully funded without primary support or cash from the AOFM. This was another first – although the AOFM supported the deal via secondary direct switches with investors for A$120 million. The final book comprised 25 investors split evenly between local and offshore.

RIEDEL We had a similar experience to Firstmac early in the crisis in that we had a deal ready to go in early March that we put on pause. This was eventually executed in early May, with the AOFM supporting the part of the capital structure where risk-adjusted demand was weaker.

We then issued in June with the AOFM supporting in the short-dated triple-A note to facilitate an upsize. This was important to enable a larger allocation to investors elsewhere in the capital structure where demand was strong. Most recently, we issued an SME-backed deal in September without any AOFM support. The evolution of AOFM’s participation is evident but has been important for our market.

I feel the senior triple-A market is still delicately poised. There is good engagement from Europe but the participation is not as broad as it was last year. Similarly, engagement from Japanese investors is more subdued. This means deals are being successfully placed but at smaller volume than pre-COVID-19 – driven by the size of the demand for triple-A notes.

Zaunmayr What is the level of confidence from issuers with regard to the robustness of investor demand as we move into what is traditionally a busy issuance season toward the end of the year?

BARRY We are unlikely to see the major banks come into the market for senior funding in any size over the near term since they are saturated with central-bank liquidity and customer deposits.

Bank and nonbank RMBS have slightly different investor pools. But the dramatic reduction in bank flow creates an opportunity for nonbanks to fill the demand for high-quality paper.

AUSTIN The nonbanks are providing the overwhelming majority of supply and margins seem to be holding quite wide. The iTraxxx index is at 65 basis points and senior-unsecured bank debt is also around this level. I think, with pricing in all sectors crunching in, it is probably only a matter of time before there is a step-down in margin. ADI issuance will remain low and the bank term-funding facility may be extended and even tightened.

TWYFORD Relative value to Europe and the UK remains attractive at the moment, which is bringing in a pleasing level of interest from some of the larger UK-based investors. Those that are capable of investing in Australian dollars can get a pick-up of 15-20 basis points.

Maintaining our stability in these economic conditions is vital for these investors, though. If there is a material push out in negative headlines, or a precipitous jump in COVID-19 cases or unemployment with a flow through to property prices, the precarious situation Peter Riedel mentions may fall the wrong way. If we can hold firm on these elements, though, we offer relative value to knowledgeable investors that are aware conditions will ebb and flow.

“It became evident through April and into May that global investors were comfortable – first with the health outcomes in Australia and second with the quality of Australian mortgage collateral. Diverse granular mortgages, low LVRs and relatively low levels of hardship contributed to this.”

Zaunmayr Prime Capital has not yet issued a public RMBS deal. How does the current situation change the equation when it comes to make a capital-market debut in future? Might this happen in 2020?

SCANLON We have two existing warehouse programmes and no plans for a term-out of either in the short term. Receivables in these pools are relatively short duration – less than three years – and high credit quality, so sufficient liquidity is being produced from borrower repayments.

Of late, we have been in discussions regarding a longer-term principal-and-interest product and an associated new warehouse facility. COVID-19 has slowed down these conversations, though, as we all take a wait-and-see approach on where the pandemic leads us.

Zaunmayr How has the mix and number of investors in securitisation deals changed through this crisis?

TWYFORD We saw a pleasing mix of investors in our PRS26 and PRS27 deals, which came in quick succession in June and August. There was crossover of investors between the deals. We had no bank involvement other than the banks that pressed strongly for allocations. We could have traded away from banks in both deals, and it is pleasing not to be reliant on balance-sheet bids.

Overall, we saw a good breadth of investors from around the world. Even so, some familiar names are not present at the moment. We are in discussion with a few of these and have a line of sight to where they are sitting.

If you were to tell me in March, at the start of the crisis, that we could complete these two deals with the books we achieved, I would have taken it. We have aspirations to be in the market again in 2020 and have a pipeline building that will allow this. We will need to be thoughtful on how we execute future deals but, to date, we have been pleased with the breadth and depth of investor appetite.

The belly of the mezzanine segment is exceptionally well bid at the moment and it was pleasing to see interest growing in the lower-rated tranches between our PRS26 and PRS27 transactions.

BARRY The investor base has been robust. Our experience is that demand has been relatively evenly split between domestic and offshore accounts, which is pleasing. The point has been made on relative value – Australian paper is still very attractive to offshore investors. This has helped encourage investors into the sector, though obviously we’d like to see the premia reduce.

GUESDE Triple-A demand from offshore is more about price than risk. Issuers just need to strike the right balance between pricing and volume. If they increase the price sufficiently they will find demand.

As I mentioned, the benchmark for global investors has always been the CLO market – and this has repriced drastically upwards and then readjusted. Last year, Japanese banks were massive CLO buyers but they have now almost stopped. They were also buyers of ADI prime RMBS but this is no longer available, so some are adjusting and looking at nonbank issuance. There is potentially interest but it is a question of pricing – and it will take time.