Beyond green: securitisation issuers contemplate social bonds
The Australian securitisation market could be on the verge of a sustainability surge, market participants believe. Green deals are likely to be the first sign of this uptick in activity but issuers are also exploring social securitisations with hopes of issuance as soon as this year.
While Australia has seen a relatively steady supply of green securitisation of alternative collateral like household solar loans, there has been limited issuance of green residential mortgage-backed securities (RMBS) since this segment kicked off with National Australia Bank’s February 2018, A$300 million (US$224.4 million) tranche.
Kensington Mortgages printed the world’s first labelled social securitisation in the UK in February 2021. The £472 million (US$619.8 million) transaction aligned with International Capital Market Association (ICMA) Social Bond Principles (SBPs) and was recognised by ISS ESG, a leading provider of corporate governance and responsible investments. The senior bonds priced at 59 basis points over SONIA.
According to deal sources, several Australian issuers are exploring their own social securitisations.
Anthony Moir, treasurer at Pepper Money in Sydney, says future social securitisations could target mortgages made to under-served parts of the community and help build financial inclusion.
“We may provide a discounted funding rate to lower-income borrowers, those living in particular regions or other specific groups,” Moir explains. “We can assist access to essential financial offerings, such as mortgages, by providing lending to segments that are not best served by major banks – such as the self-employed and small business owners.”
Pepper has issued green RMBS. The nonbank issuer kicked off its programme with A$75 million and €110 million (US$121.7 million) green tranches in November 2018 as part of a A$1.25 billion transaction. Its latest green offering – a A$330 million tranche issued on 9 March 2022 – is its largest.
There was no issuance of green RMBS in Australia in 2019-20. Firstmac broke the drought in 2021, issuing the local market’s first all-green RMBS in a A$750 million privately placed transaction.
Building scale in suitable loans and collecting data to present to investors in a digestible format are the key challenges for issuers aiming to bring sustainable securitisation deals to market.
On the other hand, David Jenkins, global head of sustainable finance at National Australia Bank, says nonbank lenders are typically well placed to issue social securitisations since they cater to borrowers suitable for such transactions and have lending products to match.
He adds that a key first step is for nonbank lenders to develop and articulate a company-wide sustainability approach. This should align with lending products and origination practices. “Kensington was able to securitise a pool of mortgages from borrowers with complex incomes who were under-served by high street banks in the UK, such as later life, early career and self-employed people or those with complex incomes,” Jenkins tells KangaNews Sustainable Finance.
European regulators are encouraging sustainable securitisation. The European Banking Authority published a report on 2 March that analysed the challenges of sustainability in the EU securitisation market and detailing how sustainability could be introduced in transactions.
“Borrowers and issuers need to be incentivised to create this kind of product. There has to be a credible basis for recognition of sustainable securitisation formats,” Jenkins adds.
Kensington achieved this by aligning its transactions with the requirements of the SBPs for its Gemgarto social RMBS transaction and the ICMA Green Bond Principles for the subsequent Finsbury green RMBS transaction.
Jenkins adds: “Both transactions were surprisingly well received by the UK market with a number of follow-on social securitisations since. These ideas are now finding their way into the Australian market.”
We can look to assist in providing access to essential financial offerings – such as mortgages by providing lending to segments of individuals that are not best served by major banks, such as the self-employed and small business owners.
On the other hand, David Jenkins, global head of sustainable finance at National Australia Bank, says nonbank lenders are typically well placed to issue social securitisations since they cater to borrowers suitable for such transactions and have lending products to match.
He adds that a key first step is for nonbank lenders to develop and articulate a company-wide sustainability approach. This should align with lending products and origination practices. “Kensington was able to securitise a pool of mortgages from borrowers with complex incomes who were under-served by high street banks in the UK, such as later life, early career and self-employed people or those with complex incomes,” Jenkins tells KangaNews Sustainable Finance.
European regulators are encouraging sustainable securitisation. The European Banking Authority published a report on 2 March that analysed the challenges of sustainability in the EU securitisation market and detailing how sustainability could be introduced in transactions.
“Borrowers and issuers need to be incentivised to create this kind of product. There has to be a credible basis for recognition of sustainable securitisation formats,” Jenkins adds.
Kensington achieved this by aligning its transactions with the requirements of the SBPs for its Gemgarto social RMBS transaction and the ICMA Green Bond Principles for the subsequent Finsbury green RMBS transaction.
Jenkins adds: “Both transactions were surprisingly well received by the UK market with a number of follow-on social securitisations since. These ideas are now finding their way into the Australian market.”
