The view from a new height
The Australian securitisation industry and its international participants gathered – in record number – at the Australian Securitisation Forum’s annual conference in Sydney in early December 2024. Discussion topics took in the record year for new issuance, future capacity and alternative funding options, credit risk profiles and the economic outlook, and market function and liquidity.
“With the continued growth of our economy, our track record as a collective, and the greater capital allocation to fixed income, there’s no reason we shouldn’t have ambitious goals. Looking ahead, I firmly believe that issuing more than A$100 billion in the coming years is not only achievable but well within reach.”
“Heightened interest has made allocations increasingly competitive. Investors often express frustration with minimum parcel size requirements, which have been a common feature of activity in 2024. Meanwhile, international investors are returning to the space, further intensifying the allocation challenge.”
“A key question is what will drive employment and demand once the ramp-up in care-related sectors tapers off. While easing cost-of-living pressures, tax cuts and positive real household income growth provide some short-term relief, the medium-term fragility of domestic demand remains a concern. Balancing these dynamics will be essential as Australia navigates a shifting global and domestic economic landscape.”
“Australia has several key differences compared with the UK and Europe, spanning macroeconomic fundamentals, structural elements and market dynamics. Some of these differences are merely noteworthy, while others require adjustments in pricing or even affect our participation in certain transactions.”
“The labour market has consistently surprised to the upside. It’s not just the unemployment rate but a broader set of metrics that paint a very firm picture. Rising hours worked, near-record participation rates, strong employment-to-population ratios and even declines in cyclical youth unemployment all point to a resilient labour market.”
“There is concern in markets about the US fiscal deficit and its long-term sustainability. While the US enjoys exceptionalism as the global reserve asset holder, other countries have faced sharp market reactions. For instance, France recently had to pay up for fiscal uncertainty, much like the UK did a couple of years ago when markets abruptly demanded higher term premia.”
“Suddenly, securitisation is being viewed as a critical mechanism to unlock the vast pool of European savings, directing it into productive investments. It could finance defence, support the green transition and help stabilise economies to prevent voters from turning to nationalist parties. For the first time, securitisation has become a political priority.”
“Despite headwinds like rising interest rates and increased bank bond issuance, the securitisation market has remained remarkably resilient. The resumption of bank bond issuance following the conclusion of the TFF was expected to crowd out demand for asset-backed securities. However, issuance levels have remained strong, driven by the flexibility of securitisation business models.”
“We all have to improve our cyber positioning, at individual corporate and industry levels. Unfortunately, it only takes one weak link in the counterparty ecosystem mix to create a potentially systemic compromise for our industry. From a securitisation perspective, cyber risks include large use of Excel for running securitisation programmes, payment directions and cash flow models. If compromised, unstructured data like these are low hanging fruit for bad actors.”
“Getting a whole trade done in a true market environment is the best way forward. This typically means mandating as early as possible, to give investors time to ask questions, and being upfront about what is available. Getting investors to do the work and then not having notes available is a sure way to make the most enemies very quickly.”
“What we’re finding with generative AI is the ability to deeply understand our customer. A simple example of this is in the business bank: from a regulatory compliance perspective, we must do an annual review for every customer. This used to take a couple of days of manual effort for our customers and the bank. Now, we’re automating almost all of it by using the insights we have from their transaction data.”
“We are sympathetic to situations where there are pre-existing warehouse rights and different investor mouths to feed at one time. It comes down to communication. If an issuer can’t give us pro-rata – if we are going to be underallocated or not allocated at all – it is good to have a line of communication either during the transaction or immediately after so we can understand the circumstances.”
“There has been a widening of credit standards: less verification for low-doc income, less self-employed history being considered and lower servicing buffers. It is too early to tell whether there will be an impact on future performance. One thing that is different since 2006 is there is much less homogeneity in products: there are different credit standards and they can be nuanced in what’s allowed or not allowed. This is something we are monitoring.”
“On some counts, cyber crime is one of the world’s fastest-growing economies – and cyber criminals view Australia as a particularly lucrative destination. We speak English – so they can use attacks designed for the UK and the US – we are highly digitally illiterate, we are often on the front edge of innovation and we are increasingly made vulnerable by our interconnectedness. The financial services sector particularly has a huge amount of supply chain dependencies that create challenges to cyber resilience.”
“The challenge is keeping ahead of the curve on AI, crypto and other emerging technology that globally we probably haven’t got a handle on including at regulatory level. The big opportunity is that we all carry and retain too much data. Regulation requires us to hold it for extended periods but the reality is this creates a greater risk to our businesses. There has to be a better way.”
“Demand in the Australian secondary market has been growing for a year and we expect this trend to continue in 2025. Growth has been supported in Asia but also in Europe, where investors have increasingly been looking into the Australian market especially after the strong rally across asset classes in the UK and Europe in 2024. However, this liquidity might dry up quickly in periods of high issuance volume where investors turn all their focus to new deals.”
“There is a perception that liquidity is better but, with the structural changes there have been, I would have expected it to have improved further. In the triple-A space, lead managers provide a good service and this is broadening out: banks are bringing on trading books if they haven’t already. In the mezzanine sector, however, I can only think of one institution that provides good liquidity. It would be great if this could expand.”
“In 2024, Westpac’s secondary turnover increased by more than 70 per cent compared with the previous two years. This growth was driven by new investors and by increased activity among existing participants. In every region where we operate, we observed at least one new Australian dollar securitisation investor trading in the secondary market, which has further enhanced liquidity.”
“We are very comfortable with the performance and stability of Australian securitisation, but spreads are tightening now and relative value compared with other global credit product is not as attractive as it was. We are now considering expanding our investment into more high-yielding securitisation to seek out returns.”
“Sadly, the composition of lead manager groups doesn’t affect our decision to invest. For this to work, we would need to be part of a collective that thinks the same way. In saying this, we would like to reward lead managers that provide secondary coverage – it is just too difficult to do so as a single investor.”
“We have always been an active buyer in the Australian market but with margins tightening we have been more selective about the types of transactions we take part in, especially given we can invest across multiple asset classes. We have been focused on higher-yielding opportunities in which we feel we are well compensated for the risk we are taking on.”
“The uptake of the novated lease product to date has come from government and large corporates, which has helped support strong loss performance. However, there will come a point where growth expands into smaller corporates and the question becomes: does the credit profile change by offering the product to smaller corporates and will the loss curve trend closer to what we see for traditional consumer autos?”
“Banks are being asked to do less and investors are being asked to do more in almost every large category of assets, from infrastructure to digital. Much of this includes long-dated financing that banks are not necessarily built to do. The rest has to come from somewhere else, whether it’s private markets or insurance companies such as us.”
“Access to capital markets should not be the only source of funding for auto lenders. Warehouses with adequate spare capacity from strong and ongoing banking relationships are also really important. This funding provides capacity to weather closures in the market and, importantly, to continue originations in those times. If access to funding gets harder and warehouse capacity limited, it could lead to changes in the competitive landscape.”
“We are very keen to explore and support new-to-securitisation collateral. We take a holistic approach to risk assessment – including review of originator and servicer strength, and performance history. The latter does not have to come from the originator or the exact product – we can look offshore for proxies we can apply.”
“If regulators are going to expect ADIs to have access to the RBA’s exceptional liquidity programme, our expectation is that there will be a broad-based adoption of self-securitisation. We hope that an ADI that is set up for self-securitisation, or that is considering it, would lever off this capability and explore warehouse financing with a view to doing term RMBS at some stage.”
“The private credit market is presented with some unique opportunities in Australia relative to the US, in that the range of asset classes that gets securitised in the local public market is much narrower. Outside mortgages it is just autos, asset finance and SMEs, and a lot of assets don’t make their way into the public market – including subprime auto, nonprime auto and floorplan finance. These are all asset classes where there is a very active term market in the US but not here.”
“In the US, we have started to witness asset managers step in where the banks were not lending anymore. One evolution is that there are a lot of BDCs, sometimes established by asset managers. We are also witnessing certain asset managers providing lending facilities and effectively acting as the agent or arranger on deals, as opposed to a bank doing so.”
“Our Australian population demographic is going to change over the next 10-20 years. A vast cohort of people will be retiring and requiring income products – and private debt should offer a compelling asset class alternative because it has the ability to generate strong yield as well as to deliver income to investors along the way. This is something we are not yet used to in Australia, whereas it is a much more established feature in the US.”
“We are now at a tipping point where some things that were theoretical for treasurers in the nonbank lending market are now becoming reality. We have talked about whole-loan sales and forward flow in Australia, but it has always sat on the whiteboard and never really jumped into reality. Now it’s starting to happen.”
“Where is private credit best suited? Frankly, it can be applied almost across the board, from long-duration assets that may be attractive to insurance companies, to pools of capital seeking higher returns that might look at leveraged transactions or alternative funding solutions such as whole-of-business securitisation. The diversity in private credit has got to a point whereby it is applicable across the gamut.”
“We are having conversations with some very large investors – global asset management platforms that need to deploy hundreds of millions. Mezzanine doesn’t work for them – they simply can’t place this volume through securitised products. Whole loans can be deployed in size, in fact they have to be. The originator needs to know that it has funding at scale for a long period because it has to represent this to its broker community.”
“Acquiring whole loans is an effective way for investment banks to deploy balance sheet toward liquid assets that generate attractive risk-adjusted returns. It also provides the bank the ability for it to build its own franchise through distributing these assets to global investors via various structures.”
“Insurance is a one-year product whereas a mortgage is a 20-year product. A house in Lismore with a mortgage written 15 years ago is probably going to find it hard to get insurance today – and it will soon be the same for properties in the Gold Coast or North Narrabeen. There’s a horizon issue in the RMBS market and I’m sure a lot of systems haven’t kept pace with checking if there is still insurance in place. The resale value of an uninsurable asset is a lot less.”
“When Firstmac started its solar product, we knew we needed data to securitise it. This was front and centre in the design. The problem was systems, and in the first instance it was very manual for our loan processing team. We’ve done a lot since then, including educating our customers on the information we need post-settlement. This has alleviated some problems but, overall, the industry needs a lot more work for green issuance to keep building.”
“Three prevailing trends are placing demand on capital and are likely to drive growth in securitisation in the next 2-3 years. The first is the ageing population: financing retirement needs will become a focal point in the future. The second is SMEs’ financing needs, which are unique and often underserviced. The last is digital transformation, AI and the exponentially growing need for data computing and storage capacity.”
“The average Australian dwelling has a NatHERS rating of 2-3 stars and there is a significant opportunity to upgrade our existing housing stock. We now have the tools to assess the approximate energy efficiency of an individual property, but for many borrowers the upgrade to a NatHERS 7 or above is cost-prohibitive. The challenge remains providing effective funding options and incentives for borrowers to continue to pursue meaningful energy upgrades.”
“I believe there will be data centre securitisations in Australia in the near future, and that they will be strongly supported by investors. A lot of data centres have stabilised revenues at this stage and setting up a securitisation programme allows the platform to further diversify its sources of funding.”
“Smaller ADIs’ interest is not so much in RMBS issuance for liquidity purposes but for capital relief. This means different opportunities can be presented. For instance, notionally, regulatory standards allow ADIs to sell the junior notes of their self-securitisations – which would create a capital-relief opportunity while not damaging the liquidity position.”
“There are five million Australian baby boomers, with a median household superannuation balance of A$200,000 at retirement but median home equity of A$800,000. Three-quarters of their wealth is tied up in their homes. Australia has great healthcare, a means-based pension, superb longevity and a universal, compulsory but inadequate superannuation system. What we need to do to win the battle of an ageing population is to free up part of the A$1.4 trillion of home equity already owned by Australian retirees.”
“We have had a really concerted effort to build out our funding capacity in the wholesale portfolio in the last couple of years, because we have quite an ambitious growth agenda. We want to ensure that we are able to continue to fund the same proportion of our book through wholesale funding channels over time.”
“The performance of our book is important but we have also been able to deliver record growth in originations in the last year. Increasing AUM above system while not increasing our credit risk appetite has been the strategy for us. A large portion of our AUM growth is post cash rate increase and most of our customers have been serviced on a high rate with a 2 per cent serviceability buffer on top of it, contributing to our low arrears.”
“In 2022-23, we witnessed electricity bills increase on average by 14 per cent. In 2024, they increased again by about 5-10 per cent, depending on the region. When a household buys solar, it can save about A$1,000 on average per year. It is no surprise that there has been a trend toward households wanting to buy solar as a starting point, to hedge this aspect of their cost of living. Demand for our product has continued to grow despite rising interest rates.”
“The challenge we are all currently facing is that we are getting beneficial cost of funds but the state of competition suggests that the lion’s share of this benefit needs to flow down to the customer in the form of price. In this context, we all have a dilemma about agency risk and franchise value. It is better for the system if we have agency for the risk we are pricing rather than laying it off to someone else. If we can do this consistently well through time, we will create franchise value.”
“In September, 37 different lenders presented discharge requests to us. If in two years’ time we are talking about the number of refinances going out in any given month, I suspect it might be down to about a dozen. This is because there needs to be, and will be, a realisation that lenders have to demonstrate profitability and a reasonable return on equity over the long term.”
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