Green RMBS takes root
In June, Firstmac issued Australia’s first solely green residential mortgage-backed securities deal. The local market has seen consistent though small-scale green securitisation of nonmortgage assets. Market participants are now somewhat optimistic about more supply in the mortgage space.
Kathryn Lee Staff Writer KANGANEWS
Green residential mortgage-backed securities (RMBS) issuance is a tantalising prospect for Australian securitisers, especially larger names in the local nonbank sector. Investor demand for environmental, social and governance (ESG)-aligned securities is growing all the time, and if securitisation issuers were able to satisfy some of it they would have access to an incremental source of liquidity at a time when funding growth ambitions is a key goal for the sector.
The challenge has historically been on the asset side. The vast majority of Australian mortgages do not take into account the emissions status of the underlying property. As a result, lenders have typically found it impossible to satisfy the data requirements of green issuance.
The answer is likely to be the development of green-mortgage products at retail level – where a homebuyer takes a green-labelled mortgage to buy a house that meets defined and measurable environmental standards. There are difficulties even here, however. These largely stem from Australia’s historical lack of nationwide homebuilding standards – at least in a form that could provide lenders with a straightforward source of comparable baseline data.
In this context, Firstmac’s A$750 million (US$550.8 million) RMBS deal, Firstmac Mortgage Funding Trust No. 4 Series 2021-3PP, could be an important breakthrough for Australian securitisation. Priced on 16 June with J.P. Morgan as arranger, it is the first Australian-origin RMBS to comprise exclusively green tranches.
The transaction builds on a foundation laid by National Australia Bank (NAB) in 2018, when it issued an RMBS deal that included a tranche of green notes. In the interim, nonmortgage green securitisation has offered consistent, if relatively small in volume, supply in Australia while green RMBS issuance has been absent (see chart).
Firstmac’s deal was privately placed with Norinchukin and Clean Energy Finance Corporation (CEFC). Firstmac is using the proceeds to fund its green-mortgage product, which offers borrowers a substantial discount on the nonbank’s standard home loan. However, the RMBS pool was seeded with A$520 million of existing loans based on proxy green criteria (see box).
Grace Tam, Sydney-based director at CEFC, says the transaction is a positive sign for the evolution of green securitisation in Australia. “In 2018, NAB was able to demonstrate the ability to do a green tranche as part of an RMBS transaction. This deal leads on from that. It not only demonstrates that it is possible to have the whole transaction as green RMBS but also that green securitisation will attract investors,” she tells KangaNews.
GREEN MORTGAGE PUSH
CEFC’s involvement in the deal meets its mandate to catalyse capital markets to support climate finance. Its goal in investing in many of the Firstmac RMBS’s junior tranches is to jumpstart green RMBS in the local market, and thus to support the spread of environmentally friendly homes.
CEFC hopes the minimum 40 basis point discount offered by Firstmac on its green home-loan product will help inspire demand. But it is a disparate and challenging environment that Firstmac, and now CEFC, hope to cut through.
“There are so many parties involved in the residential mortgage-lending market, including the builder, developer, broker, lender, borrower, government and local councils. This makes it difficult for us to find ways to encourage participants to think about home energy efficiency since there is no single key player to work with,” Tam explains. “This is unlike large-scale property development, where we can go to developers.”
Kim Cannon, Firstmac’s Brisbane-based managing director, notes a positive response to the company’s green-mortgage product that he says bodes well for the future of energy-efficient housing in Australia – as well as green securitisation.
“We have been trialling the green-mortgage product for a number of months now through our broker network and we have been pleasantly surprised by its take-up,” Cannon tells KangaNews. “I think we are going to see a massive shift over time as more people begin to look into these green packages.”
Firstmac has been offering green car loans for several years. Cannon says the company sees itself as an innovator, especially in what it clearly believes to be a growing sector. The availability of green RMBS funding could help add scale to a lender for which diversifying and expanding the funding base is an ongoing project.
Cannon continues: “Meanwhile, just about every bank and investment vehicle in the world has a green need so I don’t think there is going to be a shortage of funding available from investors. It is more a case of getting the loans in large enough volume to make it work. But there is huge broker demand for this type of loan and we see is as something of a frontline product going forward.”
A SHARED VISION
Demonstrating Cannon’s view on demand for green assets, The Norinchukin Bank took the senior tranche in the Firstmac green RMBS via a A$637.5 million investment. CEFC backed the A-2 notes, which accounted for A$75 million of its total A$108.5 million investment in the deal.
The remaining notes were retained by Firstmac, with the Class B to E notes funded via a loan from CEFC – outside the RMBS transaction – which accounted for CEFC’s remaining allocation to the deal.
This funding approach was designed to meet the risk-retention requirement of Japan’s Financial Services Agency. Paul Eagar, Firstmac’s Sydney-based director, securitisation, explains that Japan requires risk retention in the structure, which is consistent with what happens with US and European issuance. The requirement in Japan is for 5 per cent risk retention on the part of the issuer.
Firstmac, CEFC and Norinchukin collaborated on what was effectively a club-style private placement. Norinchukin was attracted to the deal due to the high standing of Australian RMBS and the fact that the deal fell in line with the bank’s own sustainability targets.
Hidetoshi Hasegawa, Norinchukin’s Tokyo-based global head of credit and alternative investments, tells KangaNews the firm has set a goal of reducing the greenhouse-gas emissions of its investments by 50 per cent between financial years 2013 and 2030. Investments like the Firstmac RMBS are helping deliver that goal.
“We recognise that ESG [environmental, social and governance] themed RMBS is a promising market and we expect further growth. We believe the spread of environmentally-friendly housing will contribute to our target, as well as to Australia’s climate-change countermeasures,” Hasegawa adds.
Norinchukin’s existing relationship with Firstmac also aided the deal, especially given the challenges its development naturally faced. “The strong relationship Norinchukin held with Firstmac before this transaction made this happen,” Hasegawa comments. “Given it was the first [all] green RMBS transaction in Australia, there were many issues regarding green standards and structures. We were also not able to visit Australia due to the spread of COVID-19, which made communication difficult,” he adds.
Data is central
Market participants agree there is potential for significant growth in green residential mortgage-backed securities (RMBS) issuance. The primary challenges continue to be loan-data capture and the related absence of nationwide environmental homebuilding standards.
“I hope there will be more green RMBS over the next 12 months. But I think a lot of it comes down to the availability of data and tailoring green mortgages so we can hand-on-heart say they are compliant,” notes Joonas Keranen, structurer at J.P. Morgan.
Keranen says the central issue is having sufficient data to allow lenders to secure the relevant second-party opinions and other requirements of legitimate green labels for their RMBS structures.
David Jenkins, global head of sustainable finance at National Australia Bank (NAB) in Sydney, says there has not been a great deal of progress on the data-capture front since NAB issued its first, and so far its only, green RMBS tranche in 2018.
On a more positive note, the value of improved data capture is becoming increasingly apparent to industry players and work is ongoing, especially by nonbank and smaller bank issuers.
Resimac’s general manager, treasury and securitisation, Andrew Marsden, tells KangaNews the obstacles do not seem as insurmountable as they once did. “We need to know the sustainability features of either the property itself or what the funds will be allocated to. We are solving this through systems enhancement,” he reveals.
This would not be a one-off task in the leadup to issuance, however. Marsden points out that issuers are obliged to provide ongoing reporting to investors even after they have printed a green RMBS transaction.
SUPPLY AND DEMAND
As well as satisfying borrower interest in emissions-efficient residences, building a book of qualifying green loans should allow securitisers to tap into burgeoning demand. Joonas Keranen, structurer at J.P. Morgan in Sydney, says the bank is seeing Asian investor interest in ESG-related issuance – for corporate debt and securitised products – making up ground on the market leader, Europe. He notes the recent emergence of investor-level monetary targets for ESG-aligned investment. These include the ¥10 trillion (US$90.3 billion) Norinchukin has allocated to deploy over the next decade.
The Australian market is also emerging as an area of interest for global investors. “We are aware of mezzanine investors that have ESG-related funds earmarked for green investments and are looking into Australia, including a couple of investors in the UK and some west-coast investors in the US,” explains Keranen.
Meanwhile, he adds: “We have talked to bank and nonbank issuers on the back of the Firstmac trade and there seems to be a big push from the issuer side to start doing ESG-related issuance. There is a lot of interest from the shareholders of these entities to start this market.”
The goal for issuers is likely to be incremental demand rather than superior pricing. Australia’s first green asset-backed securities deal, priced by FlexiGroup in 2016, offered otherwise-identical green and nongreen tranches and achieved a 5 basis point issuer discount for the former. But the approach has not been repeated.
While Firstmac’s transaction was closely marketed, deal parties are confident it marks another step on the road to a more active Australian green RMBS market. Richard Lovell, executive director, investments at CEFC in Sydney, says customer access to green home-loan products is a game-changer.
“My view is that there is strong interest in this market segment and I think we will see others seeking to do something similar,” he comments. “The challenge to some degree is that issuers have to build an asset pool. But I think this can happen once a lender has a product defined.”
Having a precedent in the market can only help. Lovell says he hopes the Firstmac deal provides a pathway for other issuers to follow. “We have done quite a bit of work on our definition of green mortgages and we are continuing to work to align our definitions with what we are seeing in global standards for this type of product,” he tells KangaNews. “This is valuable because we think it will allow other issuers to take Australian green RMBS to global markets in a form that all participants can be confident has strong environmental standards.”
There is no shortage of interest in the issuer community. For instance, Andrew Marsden, general manager, treasury and securitisation at Resimac in Sydney, says the Firstmac transaction sets an impressive example. “We think it is great. Not only is Firstmac the pioneer nonbank to have developed a genuine green product but it has also been able to launch a green funding platform at the same time. We are looking to replicate its success when we are able to,” Marsden tells KangaNews.
Again, product is the key. Marsden explains that Resimac recently launched a green home-improvement loan, designed to give a concessionally priced further advance to existing borrowers who want to add sustainability-linked features to their home, such as double-glazed windows or solar panels. Other green products will follow, including a green construction loan – which Resimac hopes to launch by the end of the year – with the goal that green RMBS will eventually form part of the nonbank’s issuance mix.
“It will depend on when we are able to launch these green products and how quickly we are able to build a portfolio. But it is definitely in Resimac’s future funding plans that we will be a consistent issuer of green RMBS,” Marsden confirms.
“We recognise that ESG RMBS is a promising market and we expect further growth. We believe that the spread of environmentally friendly housing will contribute to our target, as well as to Australia’s climate-change countermeasures.”
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