CHANDLER We are approaching approximately US$1.2 trillion in new issuance in 2024, marking a 50 per cent increase compared with 2023. Geographically, the breakdown is 60 per cent from the US, 15 per cent from Europe, 15 per cent from China, 5 percent from Australia and New Zealand, and 5 per cent from Japan.

In the broader ABS [asset-backed securities] space, strong growth has been observed in the vanilla asset categories such as autos and unsecured consumer loans. However, the most significant growth has occurred in esoterics – a category that includes data centres, whole-business securitisations, royalty transactions, solar assets and other nontraditional asset types.

Meanwhile, global RMBS [residential mortgage-backed securities] issuance is up this year but not to a particularly high total, as 2023 featured exceptionally low activity. In the US, high interest rates have led to limited origination and non-agency issuance, totalling about US$130 billion. Europe has performed better, with €45 billion (US$46.6 billion) in issuance, concentrated mainly in the UK and the Netherlands.

O AUSTIN It has been a significant year for the Australian market. The key takeaway is that conditions have been quite constructive throughout the year. There has also been a wave of new entrants, which has supported a substantial level of issuance.

The big question we will discuss today is whether this trend is sustainable, specifically for entities that purely fund in securitised format, or if we need to explore alternative funding methods to maintain growth.

It is interesting that Cian mentions European RMBS issuance of €45 billion. This year essentially put the Australian market on par with Europe and the UK – and we have to ask whether we are beginning to reach the upper limits of capacity.

There is a lot of optimism that next year could bring further growth, which is a valid perspective. But we should also consider the macro headwinds we anticipated this year, many of which did not fully materialise but could still pose challenges. Will the consistency of the market persist as we move forward? I think this is a critical point to explore.

MAGAN Further to this point, our research team has noted that Australian issuance amounts to roughly half the total European issuance across ABS and RMBS, excluding CLOs [collateralised loan obligations]. When focusing solely on RMBS, Australian supply surpasses the UK and represents about 80 per cent of total European issuance.

The key takeaway here is that Australian RMBS has gained significant importance on a global scale. As a result, a growing number of offshore investors has entered the market. Liquidity in the RMBS space has notably improved, which enhances the appeal of the product from a global investment perspective.

J AUSTIN I wouldn’t describe the current market as challenging; in fact, this year has been a record for us. We have issued A$7 billion (US$4.4 billion) of RMBS, compared with the pre-COVID-19 period when A$3 billion annually was considered a significant funding task. The market appears very constructive and I see no reason why this momentum will not continue into next year.

Our funding programmes have been built over a decade. For example, our success in distributing to Japan is the result of nine or 10 years of consistent effort – visiting annually and building relationships, even when there was no immediate investment. This foundation is solid, not built on straw.

I actually think the question of capacity may be more introspection or even ‘navel gazing’ than a true challenge. It is true that many large nonbanks are now approaching the A$20 billion mark – which has often been considered the capacity of structured credit markets, at least for pure RMBS and ABS. This prompts discussions about alternative funding methods to supplement and grow beyond the threshold. While this thinking is ongoing across several nonbanks, it doesn’t indicate any immediate shortage of funding.

MAGAN UK prime RMBS, when swapped back to one-month BBSW for consistency, is currently at the tighter end of the spectrum with pricing at BBSW plus 62 basis points. On the other end of the spectrum, US prime nonqualifying mortgages and jumbos are priced around BBSW plus 140 basis points. Broadly speaking, US CLOs are trading at a similar level now.

Australian nonbank RMBS is currently pricing in the range of 110-130 basis points over BBSW. While these securities are not the cheapest in the market, they still offer good relative value.

I have a couple of observations here. Established issuers – like Firstmac, which has built a strong investor base over the past 20 years – are having no issues with funding. However, newer issuers – those in the market for around 5-10 years – have a notable reliance on JLM [joint lead manager] participation in their deals.

The bottom line is that the level of real-money offshore investor interest for three-year triple-A tranches has not developed as much as it needs to. The lack of diversification is an area that requires further development. This disparity is reflected in pricing, too. Firstmac, for instance, consistently prices tighter than less-established prime issuers. While there is good value to be found, everything is not perfect and there is still room for growth in some areas of the market.

O AUSTIN I completely agree. There has been a significant number of new entrants into the market this year, particularly European investors. For some, it’s their first time participating or their first return in 5-10 years. But these investors have generally shown interest in bigger names like Firstmac and other prominent prime issuers.

Accessing this pool of capital has been notably challenging for smaller issuers. This is evident from the reliance on JLM support in some deals. Over time, the key challenge for smaller issuers will be to build relationships with these investors and determine whether they represent a reliable, long-term capital base, or if they are simply targeting liquid names for arbitrage opportunities.

Many investors have conducted significant credit work on a core group of issuers. Ideally, this effort would translate into greater stickiness and consistency, or at least faster reengagement with the market. For now, the challenge remains how to tap into these pools of capital effectively and foster consistent, long-term support moving forward.

MAGAN I should say I believe, all else being equal – and I think this is an important qualifier since cross-currency basis swaps are a key determinant of relative value – the entrance of a significant number of offshore investors will likely become a prominent theme as we move into 2025 and beyond.

The bigger question lies at the macroeconomic level – not so much concerning Australia’s unemployment rate or similar factors, but rather the key drivers influencing the cross-currency basis swap itself.

J AUSTIN We haven’t implemented any alternative funding options yet but we are actively evaluating them. Broadly, I see these options falling into three categories: whole-loan or forward-flow transactions, term warehouses and foreign-currency issuance.

There are advantages. Term warehouses, particularly 3-5 year, fully-drawn revolving structures, could help mitigate the risks of 12-month repricing on a significant portion of the balance sheet. Foreign-currency issuance and whole-loan or forward-flow transactions can tap into new sources of funds. We would have to be careful not to cannibalise existing investors with a different product type but I don’t think this is inevitable.

However, each of these alternatives comes with a premium; there is no doubt that Australian dollar RMBS and ABS remain the most efficient funding options. The real questions are whether and how to supplement this efficiency with one of these alternatives. Which option is most viable remains to be seen.

Whole-loan and forward-flow transactions were a particularly hot topic at a recent KangaNews nonbank roundtable. My sense is that there is growing interest and some whole loans are being executed domestically, but the volume of completed transactions in this space is still limited.

MAGAN We looked into whole loan-trades for mortgages – including running the numbers. Our conclusion was that the spreads were simply too tight to offer a competitive price for prime and ultraprime products. But it should be possible to find a spread that could be attractive to sellers of nonconforming loans.

J.P. Morgan is not currently a buyer of whole loans, but it’s an area we are actively exploring in Australia. If we decide to move forward, it would likely take about 12 months to get everything up and running.

Even so, I remain a bit skeptical about how many willing sellers we would find in the mortgage space. While ABS is certainly interesting, not many mortgage originators are eager to ramp up their originations and sell to a third party.

O AUSTIN My sense, though, is that this is partly because the market has been so conducive. If there is a turn, the whole-loan approach could potentially become more appealing.

I agree with James that it is important to proceed with caution – issuers don’t want to cannibalise their public securitisation programmes. Instead, they should focus on asset subsets that don’t align with their programmes, or target investors and sources of capital that wouldn’t typically participate in their public deals.

A great example is large offshore private credit managers with insurance mandates. If they are managing private credit and insurance mandates, a whole-loan sale makes a lot of sense. They can internally securitise, take the triple-A tranche for their insurance mandate and allocate the rest where it fits.

J AUSTIN What makes this particularly relevant now is that most nonbanks have significantly diversified their product offerings since the TFF [term funding facility]. They now have a much broader range of products, margins and options, providing them with more levers to pull than they did before.

MAGAN It gets more interesting still in the context of M&A and the potential implications for funding strategies. Consider a scenario in which two large originators merge into a single entity. If the resulting firm’s balance sheet reaches a size of A$30-40 billion, it is highly unlikely that domestic issuance alone would be sufficient to support its funding needs.

In such a case, the merged firm would need to explore alternative options, such as foreign issuance, whole loans or US 144A transactions. As Oscar pointed out, these are all viable avenues but they come with associated costs that must be carefully considered.

Regarding the point about offshore insurance companies, the ABS East conference, held in November 2024, highlighted a key theme: large asset managers, pension funds and insurance companies are planning to ramp up their whole-loan purchases. It’s likely this trend will extend to Australia.

CHANDLER Absolutely. Something we have observed globally, particularly in Europe and the US, is asset managers seeking to acquire large chunks of whole-loan books. They structure these themselves, often taking the entire zero-to-100 tranche directly from the originator.

MAGAN It is worth pointing out that ‘whole loans’ can mean different things to different people. When we talk about whole loans, forward-flow or whole-loan trades, these can all represent different concepts.

For instance, a whole-loan trade could simply mean J.P. Morgan buying a portfolio from Firstmac on a one-off basis – it doesn’t necessarily involve forward flow. Alternatively, J.P. Morgan could take down the senior tranche, with an asset manager taking the mezzanine and equity tranches. In this case, the asset manager is the buyer while J.P. Morgan acts as the funder, potentially providing a warehouse facility that guarantees the spread as additional assets are added.

There is a wide range of structures and approaches for whole loans, each with its own pros and cons. In the Australian mortgage space, mortgage pricing is determined by what originators charge borrowers. This can create a disconnect for whole-loan buyers. For example, if a bank buys a portfolio from a nonbank and wants to increase rates, the power will almost always remain with the originator. In fact, from a technology perspective, nonbanks can’t just re-price loans they have sold since pricing typically operates at the product level. This potential misalignment of interests is an important dynamic to consider.

Another consideration is servicing. Originators often assure buyers that assets they sell will be serviced the same way as those they retain. But what happens in the rare scenario where things go south? If delinquencies rise and the servicing team is under pressure, there is a risk that management might prioritise the portfolio it owns over the portfolio it has sold. Ensuring alignment of interest and managing these risks is critical in these transactions.

J AUSTIN I don’t think any originator would realistically be able to segment their portfolio and treat certain customers differently. Everything is typically managed as one big group, without distinction. Attempting to segment like this is probably overengineering the process.

O AUSTIN It all comes down to alignment of interest. These arrangements need to be set up programmatically to ensure the issuer retains some economic value. Many offshore mandates, meanwhile, are really focused on building long-term relationships and ensuring a clear alignment of interest. Without this, the points made are absolutely valid.

O AUSTIN Foreign issuance is a particularly interesting area. It gained prominence before the pandemic then its dynamics shifted during COVID-19 with the TFF and the excess liquidity in the market. This has now dissipated. While foreign issuance can be expensive, particularly due to the cost of cross-currency swaps, the key is to approach it pragmatically. The decision largely depends on the specific market an issuer is aiming to tap.

In 2024, Australia has produced two notable foreign-currency deals: one executed by Firstmac in yen and another sterling transaction targeted at a particular subset of investors.

These deals exemplify the potential to engage new investors that might otherwise overlook a programme. For instance, we have done considerable groundwork in Japan over the last few years and a significant pool of untapped investors is interested in this asset class but prefers to avoid currency risk. This aversion has only intensified following the volatility in Australian dollar-yen over the past two years.

Previously, many Japanese investors bought assets through repackaged notes, rolling their currency hedges every 3-6 months. However, there is now growing demand for hedging over the duration or weighted average life of the assets.

For issuers, this means carefully balancing the cost-benefit equation. As James mentioned, foreign-currency issuance often comes with a slight premium but it grants access to otherwise unreachable capital, enabling issuers to grow.

The crux of success in foreign-currency issuance lies in being pragmatic and strategic, particularly concerning basis swaps. It requires having investors engaged and ready to act when market conditions align – these opportunities often present themselves in brief windows.

The mandates we have been discussing today are typically from highly sophisticated investors – such as large global insurance funds – that are willing to invest significant effort into understanding the offering. These investors aren’t overly concerned about undertaking the time and work to understand more bespoke credit risk if they see potential for consistent issuance over time.

Issuers should consider these dynamics as the market evolves. Sustained growth in public markets is ideal, but market disruptions up to and including temporary closure can leave originations ongoing while traditional funding channels stall. In such cases, having alternative sources of capital becomes critical. Foreign issuance, when approached with the right strategy, can be an effective solution to bridge these gaps and ensure resilience in funding strategies.

MAGAN There is competition at multiple levels, and I think this has been a key theme of 2024 – a theme that is likely to persist. Competition is particularly evident in the investment banking space, with a significant influx of offshore banks entering the warehousing market. This provides substantial demand and an abundant supply of warehouse funding.

Spreads have compressed dramatically. In 2023, single-B spreads were more than 900 basis points over BBSW; in 2024, they have tightened to below 400. This shift speaks volumes. We are receiving calls several times a week from lenders eager to deploy capital. This makes for a challenging market for investment managers.

On the other hand, this dynamic has resulted in an abundance of funding available to nonbanks, which in turn has intensified competition in the sector beyond what it was in previous years.

Heightened competition is also leading to looser credit standards. Fitch Ratings has termed this phenomenon “underwriting creep”. Take the definition of “full doc” for self-employed borrowers: it traditionally required two years of tax returns. While this remains the standard for institutions like Firstmac, many issuers now only require one year of tax returns. This shift can create confusion for investors as well. Another point to consider is pricing compression. The gap between prime full-doc and alt full-doc loans is narrowing.

Overall, these trends suggest a decline in credit quality. While I’m not overly concerned about the current state of credit standards, I am focused on their trajectory. If this level of competition continues unchecked, the market may find itself in a challenging position in the coming years.

CHANDLER Performance hasn’t shown any significant deterioration to date. One of the statistics shared at this event highlighted that the stress testing of the current book, conducted at rates 3 per cent above origination levels, suggests that most loans are performing beyond their tested thresholds. So far, we haven’t seen any notable negative performance emerging.

MAGAN That’s because unemployment is only 4.1 per cent.

CHANDLER No doubt – this is true. But across the board the real question is: who is originating credit right now and what is it replacing? If borrowers that were previously unbanked are coming into the market, it is a clear indication of underwriting creep. However, if it is simply a matter of heightened competition it is a different story. Historically, pricing in this market has been relatively high compared with other jurisdictions. I wouldn’t go as far as to call it a cartel but it has certainly been maintained at elevated levels.

MAGAN Until recently, I would have agreed. At this stage, though, it is clear that increased competition has driven pricing changes. It is worth noting that the buffer has shifted from 3 per cent for banks to around 2 per cent for nonbanks, and it is now trending closer to 1 per cent.

I don’t want to come across as overly negative because, fundamentally, the RMBS market in Australia is strong and will remain so. However, the dynamics are starting to feel reminiscent of the pre-financial-crisis period. My concern is ensuring that it doesn’t weaken further from here.

J AUSTIN I think trying to apply the playbook from the financial crisis is excessively negative. I agree that markets might have a hint of the atmosphere from 2005 but the situation today is fundamentally different. An abundance of liquidity doesn’t automatically equate to loosening credit standards or a repeat of past scenarios.

The regulatory environment is much stricter now. We have a responsible lending regime in place and ASIC [the Australian Securities and Investments Commission] has been proactive, particularly on hardship provisions. Its agenda for the coming year focuses on vulnerable borrowers, to ensure robust safeguards. As Cian highlighted, this is reflected in the low level of arrears in Australia – even after a 425 basis point rate hike. Arrears remain at just 50 basis points for 30-day delinquencies.

I don’t see signs of credit standards slipping. Many of us experienced the financial crisis first hand, but there is a risk of relying too heavily on the old playbook and therefore potentially overreacting to current conditions.

O AUSTIN Investors have done significant work on this. Going back two years, many European investors expressed concerns about the fixed-rate mortgage cliff and potential asset performance issues in Australia. As a result, many stayed out of the market and this led to significant spread widening.

Since then, the market has performed exceptionally well. This strong performance over the past couple of years has brought many of these investors back. The common theme from European investors on roadshows I have participated in this year has shifted. Their primary concern has changed from credit and is now access to supply.

I understand Steve’s perspective. But I also agree with James that credit quality remains very strong. It is certainly something to monitor heading into 2025.

CHANDLER Global forecasts across most asset classes are broadly positive for 2025, ranging between 10 per cent and 20 per cent growth depending on the region and asset class.

If rates come down in the US, issuance could jump quickly to US$200 billion from US$130 billion. There is definitely capacity to support such an increase. Additionally, Basel III is likely to play a role as more banks globally may offload prime assets. This would further boost supply.

O AUSTIN There is also growing concern over European sovereign debt. The key question is how long this can persist without spilling over into other markets. But we have already faced significant challenges this year, including political uncertainties, delays in the Fed [US Federal Reserve]’s cutting cycle and broader global headwinds. Despite these, the market has shown remarkable resilience.

However, with ongoing geopolitical tensions – including two active wars and the evolving situation in Europe – we must remain cautious and vigilant. It’s certainly worth keeping a close eye on any potential ripple effects into other markets.

MAGAN I’ll start by noting that demand across nearly all levels of the capital stack has been unprecedented in 2024, at least since the financial crisis.

Will it continue? Our research team certainly believes so. It estimates total European ABS and RMBS issuance will reach approximately €85 billion, compared with about €40 billion for Australia. This reflects a significant level of issuance in Australia relative to Europe.

On the supply side, one notable factor is the potential reintroduction of a 7 per cent cap on agency purchases of investment loan RMBS by the US government. If implemented, this could lead to significantly higher nonagency RMBS issuance in the US, which would be interesting to watch for its impact on relative value.

Overall, the base case for next year points to more of the same, with demand and issuance likely to remain robust – barring a global recession, of course.

J AUSTIN We had our best-ever year in 2024, so I’m very optimistic about the period ahead. I believe Australian assets will continue to perform strongly. While we can’t control global events, as long as we position our balance sheets effectively I see no reason why we can’t achieve another excellent year.