David de Garis, director, economics at National Australia Bank (NAB), described the Reserve Bank of Australia’s “narrow path” to a soft landing. The reserve bank has pushed its forecast of when inflation will return to the 2-3 per cent target band back to mid-2025 from the end of 2023, and de Garis said it “will have no patience for the date to slip any further” even if this means further rate hikes.

Higher rates have two likely consequences for the securitisation sector: a rise in loan arrears, and lower overall levels of origination. Australian market participants say the former has happened but arrears are still well within an expected range having come off a historic low.

Martin Jacques, Westpac Institutional Bank’s head of securitisation and covered bond strategy, told delegates at the ASF event that the pickup in arrears in early 2023 can so far mainly be attributed to typical seasonal patterns. He added: “Arrears were unsustainable at their previous level – they had to go up, in line with 400 basis points of cash rate increases.”

Meanwhile, nonbank lenders continue to find the prime mortgage market tough but say demand is still in evidence elsewhere. This includes lenders seeking diversity in their books outside the mortgage space, a strategic direction that has already sparked growth in scale and breadth of Australian nonmortgage asset-backed securities issuance. But nonconforming mortgages will remain the bread and butter of the sector.

“Our origination volume has been relatively steady – we expected a decline but we are yet to see it come through,” revealed Martin Barry, senior vice president and chief financial officer at La Trobe Financial. “The fact is that borrowers who do not meet bank lending criteria still need a solution from the nonbank sector.”

The good news on collateral quality in existing securitisation pools is that because nonbanks – which have dominated the issuance market in recent years – always found it hard to compete for fixed-rate loan business, their loan books are less exposed to any fixed-rate mortgage ‘cliff’. Attention in Australia remains focused on this phenomenon, under which borrowers roll off ultra-low rates and suddenly have to confront a dozen rate hikes in one fell swoop.

Jacques noted that while the average Australian residential mortgage-backed securities (RMBS) pool typically includes around 15 per cent fixed-rate loans, there is significant disparity between issuers. The figure is around 25 per cent for major-bank RMBS but less than 10 per cent on average for nonbanks. On the other hand, he also emphasised that there is as yet no observable correlation between the fixed-rate collateral component and RMBS performance.

Overall, Barry said: “I think we are all still expecting some degree of slowdown in origination volume and therefore it would not be a surprise if securitisation issuance fell. This is not related to the state of the funding market, though – there are still good windows to do deals and investors remain willing to engage with longstanding and new issuers.”

There is certainly an incentive in place for the buy side to look at new issuance. Jacques explained at the ASF briefing that issuance spreads remain significantly wider than they were two years ago with significant divergence of pricing based on collateral, deal timing and issuer. He ascribed variable pricing at least in part to a broader definition of “prime” loan assets, which allows more issuers to bring prime-labelled deals to market but with a wider range of investor views on the collateral.

At the same time, other market participants agree that the tone is broadly positive. One European investor speaking on the sidelines of the London event noted an ongoing flow of attractively priced securitisation supply over recent weeks, while issuers commented on the ability to find liquidity for new transactions even in more difficult periods.

RedZed’s treasurer, Rick Li, discussed the issuer’s three transactions priced over the past year – all of which he said were executed in challenging market conditions. Nonetheless, he added: “The market has been resilient with a fair degree of investor confidence. For instance, it was even possible to conduct primary issuance and new warehouse business during the period of elevated BWICs [bids wanted in competition] in 2022.”

Li highlighted growing interest from international investors across the capital stack. “It is encouraging to see them coming back and I am hopeful that this demand should in time lead to spread compression,” he commented.

Lionel Koe, executive director, securitisation origination at NAB, highlighted the role of international investors – in particular European accounts – in picking up the slack left by the end of the bid from Australian banks’ committed liquidity facility books. Koe also pointed to returning interest from Japanese investors who, he said, are “back, in a meaningful way, for senior and mezzanine notes”.

The relatively healthy state of the securitisation market, coupled with banks’ increasing funding needs as the term funding facility (TFF) continues to roll off and the competitive landscape for loan origination, could spark some degree of revival in issuance by authorised deposit-taking institutions (ADIs).

While there is little expectation that the big-four Australian banks will return to their peak issuance given the scale of alternative funding options now available to them, speakers at the ASF event drew attention to substantial recent RMBS transactions priced or in process from the likes of Great Southern Bank, HSBC and Suncorp.

Koe commented: “The roll-off of the TFF and growth of bank lending books has led to increased enquiry from ADIs about RMBS issuance. This will be an important theme throughout the rest of the year.”

Deal flow will probably not be a flood, though, as issuers have to go through the process of reviving structured finance programmes. Fiona Gaal, director, structured capital markets at ANZ, commented: “A number of ADI issuers are re-engaging with securitisation issuance for the first time in several years. This entails some work on their part – especially the smaller and regional banks – in the sense of presenting their stories to investors. Many are effectively starting from scratch, and some are finding it hard work.”

Another challenge for prospective bank issuers is whether to push for capital relief from their RMBS or to use the instrument purely for funding purposes. While the capital benefit is relatively small it has been valued by issuers at various times, though there have also been periods in which funding-only transactions dominated the bank issuance landscape.

The main outcome ADIs want to avoid is having and then losing capital relief status, which can happen if the regulator believes an issuing bank has to support the loan pool through the life of the security – for instance by becoming a net payer of an interest-rate swap entered when issuing the RMBS.

Koe suggests other issuers might follow the approach taken by Great Southern Bank in the Harvey Trust Series 2023-1 RMBS transaction, which priced with volume of A$750 million on 9 June. The deal was structured as a funding-only trade but with the potential to flip to capital relief should the economics stack up.