Australian dollar securitisation issuance bounces back
Australia’s securitisation market has maintained deal volume at a level in line with outcomes from recent years despite massive upheaval to the supply and demand picture in 2020. In particular, bank issuers have been all-but absent this year. A particularly active September and October for new issuance kept annual volume robust.
Chris Rich Staff Writer KANGANEWS
Matt Zaunmayr Deputy Editor KANGANEWS
A large drop in H1 deal flow saw new-issuance volume at its lowest point since 2016. Q3 deal flow, however, has bounced back significantly with A$11.3 billion (US$8.1 billion) printed – the most for this period since 2017 (see chart 1).
Most issuance came in September as a total of A$5.8 billion printed across nine transactions (see table). Volume was bolstered, for the first time in the COVID-19 era, by supply from authorised-deposit taking institutions (ADIs) that accounted for nearly half the month’s total issuance.
Deal flow continued at the start of Q4 in advance of potential headwinds – notably the US election on 3 November. Three more deals priced in early October while mandates were also outstanding for Allied Credit, Brighte, flexigroup and Pepper as at 16 October.
The Reserve Bank of Australia (RBA)’s term-funding facility (TFF) has replaced bank issuance over 2020, and more than 70 per cent of total Australian dollar securitisation has come from nonbank names. Nonbank issuance for Q3 almost topped H1 volume, with A$8.4 billion printed versus A$8.9 billion. Year-to-date 2020 nonbank issuance is only A$6.2 billion shy of the record A$23.5 billion printed last year.
In a sign of returning confidence, the Australian Office of Financial Management (AOFM) – through the structured finance support fund (SFSF) – has not participated in a primary securitisation transaction since mid-June or been active in the secondary market since 1 July.
Established at the height of the COVID-19 pandemic to ensure access to funding markets for lenders outside the RBA’s TFF, the SFSF’s attention has turned to warehouse investments and a forbearance special purpose vehicle (FSPV).
Its intervention has been low, even so. Between 1 July and mid-October, the AOFM invested A$467.3 million in warehouses and dedicated A$56.5 million to the FSPV.
Market sources say investor interest in securitisation product is being supported by a lack of competing supply. With the TFF in full effect, Australia’s major banks have been absent from senior-unsecured and RMBS markets – and the buy side is starting to look for product alternatives.
“There has been significant demand for securitised product, driven by lack of supply and the relative value of what investors can buy globally,” Sarah Samson, head of securitisation originations at National Australia Bank in Melbourne, reveals. “Investors still need to allocate as redemptions and cash flow through their accounts.”
This redemption story is especially significant as a demand driver. Craig Johnston, Deutsche Bank’s Sydney-based head of syndicate, explains: “There was in excess of A$7 billion of redemptions from the major banks between July and September. The lack of senior-unsecured issuance from them and other ADIs, and the fact that spreads are tight, has led investors increasingly to turn toward RMBS on a relative-value basis.”
The pricing equation is still finely balanced but the signs are that relative value is working for investors. John Stormon, head of securitisation, Australia and New Zealand at MUFG in Sydney, tells KangaNews: “There has always been confidence in the securitisation market but the challenge has been pricing. With the levelling of the COVID-19 curve, we have seen corporate spreads contract and price compression flow through to the structured-finance environment.”
Samson notes that order books stayed strong in recent RMBS deals even through the price-tightening process – something she says NAB had not seen prior to COVID-19 when bids would typically drop off beyond a certain price.
In particular, offshore real-money interest in Australian RMBS transactions has continued to support deal flow – demonstrated once again in four of the transactions printed in September (see charts 2 and 3).
Stormon adds: “There is healthy demand from domestic and international investors, with a continued recognition that Australian RMBS offers a high degree of quality priced in line with an appropriate level of risk-adjusted return.”
While there remains no sign of a return to benchmark issuance by Australia’s major banks – although Commonwealth Bank of Australia completed a refinancing trade in September – the securitisation market has become sufficiently appealing to attract some ADI issuance. As well as AMP Bank’s A$1 billion RMBS, September saw HSBC Bank Australia’s first RMBS transaction since 2007.
HSBC Australia seized on the absence of local bank supply to tighten pricing and increase volume – to A$1 billion from A$750 million at launch. The bank plans to be a prominent issuer of capital-relief RMBS in future. Guy Dickinson, HSBC Australia’s Sydney-based treasurer, says capital relief, rather than funding, was the issuer’s priority. In this context it benefited from the supply dynamic as margins have tightened across the capital stack.
Dickinson tells KangaNews capital-relief RMBS will be a regular part of HSBC Australia’s market activity going forward. “We had strong mortgage growth in the 2020 financial year – well above system. We want this growth to continue and to fund it we will be looking to bring a capital-relief RMBS deal every 12 months or so,” he explains.
He adds that the size of future transactions will depend on the ongoing growth of HSBC Australia’s mortgage book, but that messaging on intended frequency of transactions was a key part of investor engagement for the deal. The bank’s approach to COVID-19 relief was the other main aspect of investor questions during marketing.
On 10 September, the Australian Prudential Regulation Authority released statistics on the Australian banking industry’s ongoing level of COVID-19-related loan deferrals. HSBC Australia’s share of total loans subject to deferral was less than 5 per cent, lower than any other major or large regional bank.
“We have been engaging with customers every three months to ensure the loan arrangements we have in place remain appropriate. As a result, many that were deferred have returned to full payment. Investors appreciated this colour on our loan book,” Dickinson says.
No deferred loans were included when the Lion 2020-1 loan pool was cut at the end of July, he adds.
There are also signs that nonmortgage asset-backed securities (ABS) can find demand in Australia. Liberty Financial and Thinktank issued commercial mortgage-backed securities (CMBS) transactions in the September-October deal flow. Zip Co returned to market for its second buy-now, pay-later ABS deal and Brighte is lining up a debut public deal backed by household solar loans.
Samson comments: “The pipeline of mandates for nonmortgage ABS is a combination of issuers being ready to come to market and improved conditions. Investors watched how these books performed in COVID-19 hardship and, in a lot of cases, the level of consumer loans in hardship for these issuers is less than for mortgage lenders.”
Liberty’s ABS was its largest-ever SME deal (see chart 4). Peter Riedel, the nonbank lender’s Melbourne-based chief financial officer, says the outcome exceeded expectations amid the market backdrop created by COVID-19. The SME sector has not escaped the COVID-19 crisis and Riedel acknowledges that investors are understandably cautious on the asset class.
However, over time the collateral mix of Liberty’s SME transactions has evolved toward a heavier weighting of self-managed superannuation fund (SMSF) investor loans, diminishing some concerns around collateral.
“In this transaction, 88 per cent of the loans in the collateral pool are to SMSF borrowers,” Riedel tells KangaNews. “The credit support that comes with lending to SMSF investors is significant. Given this clarity, most – if not all – investors were comfortable to participate.”
The security backing the loans included in the latest CMBS pool is split roughly evenly between residential and commercial collateral, Riedel adds.
According to Liberty, 80 per cent of the deal was allocated to domestic investors. Riedel says the SMSF asset class is more familiar to domestic investors, leading to a typically higher reliance on this buyer base in Liberty’s SME deals. He adds that some offshore mandates also prohibit investment pools with exposure to commercial property.
The participation of domestic investors in Liberty’s SME CMBS also suggests an improving outlook, as Riedel also says many participated with greater volume than in Liberty’s A$800 million RMBS deal priced in June.
He explains: “The impact of COVID-19 is now better understood than it was in the early months of the crisis. Borrowers and customers that need support – whether it is from banks, nonbanks or superannuation funds – are largely known. The need for investors to hold higher volumes of liquid funds therefore seems to have lessened and, in turn, investor demand for ABS has risen.”
Riedel is confident of the performance of Liberty’s loan portfolio through the COVID-19 crisis, regardless of asset class. He tells KangaNews non-SMSF SME loans have been the most affected portion of its lending book, but overall the proportion of customers on full payment holidays has been negligible from the beginning of the crisis.
Liberty had about 8,000 customers on payment arrangements at the end of April, but only 0.4 per cent of these were on payment holidays. By the end of August, only about 2,000 customers were on reduced-payment arrangements. Liberty’s approach means liquidity flows coming into existing trusts have remained consistent. Riedel says this has been noted by investors.
“In executing payment arrangements with customers, rather than taking a one-size-fits-all approach we tailor a solution for the customer based on their unique circumstances,” he explains. “Borrowers, lenders and investors all benefit if customers are able to continue to make loan repayments appropriate to their circumstances even at a reduced level.”
Liberty’s confidence in the performance of its loan portfolio is matched by belief in its ability to access funding markets. Three of its four securitisation transactions in 2020 have come since the beginning of the COVID-19 crisis and it also printed a senior-unsecured deal in February.
Its funding plans for 2020 are not over yet. Liberty’s 2016-2 and 2016-3 RMBS deals have call dates in the final quarter of 2020, and Riedel says based on recent investor engagement it is confident it will be able to issue a new deal with these assets.
“We will keep looking at the market and monitor how it evolves in response to the crisis. But we are encouraged by the stability and improving conditions we have seen in recent months,” he tells KangaNews.