Source: KangaNews 2 October 2024

Intermediaries report that the securitisation market's strong performance has exceeded expectations coming into 2024 but that they see no reason to doubt that momentum will continue into next year.

“It has absolutely exceeded expectations,” says Sharyn Le, Melbourne-based global head of securitisation origination at National Australia Bank. “There has been considerable interest from offshore investors, including new participants from Japan and the UK. Mezzanine tranches remain highly sought after, with strong demand at the offered levels. While demand for senior tranches is beginning to show signs of easing, the market is still effectively absorbing the available volume,” according to Le.

Graham Metcalf, head of structured capital markets at ANZ in Sydney, highlights the rise of nonmortgage asset-backed securities (ABS) in the product mix. The back to back record volume years have included a disproportionate contribution from non-RMBS deals, which make up roughly one-quarter of the total in 2023 and 2024 to date having been less than 15 per cent as recently as 2019 and 2020 (see chart 2).

Source: KangaNews 2 October 2024

Auto and equipment ABS has been the biggest single contributor, as nonbank lenders have flooded into a gap created by banks exiting the auto loan market. “Nonbank auto lending and leasing companies are growing rapidly and these lenders are typically dependent on securitisation for funding,” Metcalf explains.

While banks’ exit has boosted auto ABS, ironically their return to another sector has further boosted overall securitisation volume. Banks are still the dominant mortgage lenders in Australia – especially in the prime sector – but in aggregate their use of securitisation as a funding tool had fallen significantly. While not back to its all-time peak, a rebound in 2023 and 2024 has provided a good complementary flow of new RMBS issuance (see chart 3).

Source: KangaNews 2 October 2024

“This is largely a technical matter, as banks have a range of funding options including substantial deposit bases, so how much RMBS to include in their funding plans is a strategic decision,” Metcalf adds. “But with credit spreads tightening and a receptive market, securitisation becomes an attractive option to maintain diversified funding. This has been a significant driver.”

Andrew Cunningham, executive director, securitisation at Commonwealth Bank of Australia, adds: “The increase in ADI securitisation this year has surpassed initial expectations. This increase can be attributed to several factors, including repayment of the TFF [term funding facility] and the normalisation of overall wholesale debt funding needs. It has also been supported by the relative value of securitisation compared to other funding alternatives.”

Antony McNaughton, head of asset securitisation at ING in Sydney, tells KangaNews: “We expected larger volume following the wind down of the TFF – as, essentially, the banks’ replacement funding requirements filtered through the market. It’s been an encouraging sign of market resilience that appetite has been absorbed by investors this year. In securitisation more broadly, market participants are getting more and more comfortable with the asset class and the way that it works in Australia. We continue to see year-on-year volumes increase.”

On the demand side, intermediaries report that issuance growth has marched hand in hand with the ability to find incremental demand for senior notes. In this context, bankers say it has been encouraging to witness increasing interest from the Asian investor community.

These investors are typically familiar with bank senior risk but are now engaging with bank, and increasingly nonbank, RMBS as extensions of their exposures, according to Preethi Visweswara, director, asset backed securities at Deutsche Bank in Sydney.

She is even more positive about growing interest from a wide range of offshore investors in the nonmortgage ABS asset class. The structural shift on the supply side is being met with very healthy global demand. Many offshore investors are quite familiar with auto ABS, which is a deeper and more liquid markets globally than has traditionally been the case in Australia.

Given auto ABS was not a significant part of the Australian market before the last two years, offshore investors have been finding a lot of relative value in it. “Our orderbooks show at least 70 per cent of orders for auto ABS are coming from offshore accounts, compared with about 50 per cent for RMBS,” Visweswara reveals. “Even though the market is expanding, investors are stepping in to meet the growth – and the pace is particularly accelerated in ABS.”

Meanwhile, mezzanine demand has been more than conducive for new issuance for an extended period. New investors continue to come into the space, and lower-rated deal tranches are habitually oversubscribed sometimes by a factor of 10 or more times. Metcalf says the cost of this funding has decreased by about 100 basis points on average across the curve since the start of the year.

Overall, there has been ample demand across the capital stack and collateral types in an environment of periodic risk events and looming geopolitical crisis – one, in other words, where it makes little sense for issuers to fall behind on their funding plans.

Perhaps the biggest factor that led some market participants to anticipate eased issuance in 2024, however, was the expectation that lending competition would cause consolidation in the nonbank lender space. In fact, origination opportunities appear to have improved and intermediaries now say a significant near-term consolidation trend is unlikely.

“We haven’t heard of any material industry consolidation happening,” Le says. “However, it's clear that businesses are re-evaluating their core markets and products. For example, some large Australian nonbanks have announced their exit from noncore markets like New Zealand to focus more on the stronger growth in the Australian market. They are also diversifying their product offerings to capture a broader group of borrowers.”

Visweswara tells KangaNews she believes the diversity of the nonbank sector is sustainable even if the competitive environment poses further challenges. The primary reason is that these lenders have long excelled at deeply understanding their customer bases – often more so than some banks.

“Nonbanks have highly tailored risk settings that depend on their specific type of customer and collateral, along with very strong collections discipline,” Visweswara explains. “Since they lack the safety net that traditional banks enjoy, nonbanks are more reliant on their own lending practices to support their portfolios.”

This expertise is reflected collateral performance, which should provide securitisation investors comfort in a difficult economic environment. Visweswara highlights the “noticeable difference” in book performance in which nonbanks often outperform due to their disciplined underwriting and approach to managing collections.

“This is why the term ‘speciality finance’ is so fitting: it is the core strength of nonbanks, which excel in understanding, tailoring, and managing the entire lifecycle of their products,” she adds.

Entering the final quarter of a very positive year, intermediaries say issuers are enjoying spread compression while investors are largely satisfied with asset performance. McNaughton says that, in the short-term, the Australian securitisation pipeline looks full – with one caveat.

“There is still concern about the US election,” he says. “This was one of the main factors driving issuance in the first half and it continued into Q3. We believe it may continue in the later part of Q4 depending on how the market digests the US election outcome.”

Looking further ahead, there is a degree of confidence about 2025 but also a suspicion that there may not be further volume gains to be made. “Next year, I expect volume will likely be in line with 2023-24 levels but I don’t anticipate a significant increase beyond them,” Le reveals. “Market participants are fairly established at this point and we don’t foresee many new entrants. In fact, there could be a slight decrease in issuance volume as banks push more into their own proprietary [mortgage distribution] channels.”

Assuming the political backdrop is stable, McNaughton says the market should remain broadly conducive. “Predictions are for rate cuts to come soon, given the US Federal Reserve has taken the first step and recent inflation prints have been relatively weaker globally. There could be a new local borrowing wave as a result, though whether it is initiated in Q4 following the US election or in 2025 remains to be seen.”

Others are prepared to contemplate another step-change upwards. Tim Eastwood, head of global financing and credit trading, Australia at Deutsche Bank in Sydney, argues that the outlook is “extremely positive”, based on the stable performance of issuers’ portfolios, and strong demand from global and local investors.

“Conditions are highly conducive to bringing new products to market, which is likely what we’ll see in 2025 and beyond,” Eastwood adds. “The only real question is when we will reach A$100 billion in issuance. I’m quite confident this will happen within the next two years—maybe even sooner.”

Growth will be led be expanding segments of the lending market, he continues. For example, Eastwood notes significant growth in self-managed superannuation fund mortgage products and of novated leasing in the auto market – both of which Deutsche Bank anticipates will continue.

“There is also the rise of alternative collateral types,” Eastwood continues. “For example, in Australia we have limited financing of social housing issuance, compared with Europe or the US, but we are actively working on this. We believe there is huge potential here, especially given the support there has been for similar transactions like those Deutsche Bank has executed in the UK.”

Another example is digital infrastructure, which has spurred the emergence of data centre ABS issuance, particularly in the US. Eastwood says Deutsche Bank expects to see similar opportunities in Australia. “As the data centre industry continues to develop and assets are completed, it creates an ideal scenario for securitisation,” he suggests.