Structured deals struggle for acceptance
Australia’s residential mortgage backed securities issuers have work to do to convince international investors their offerings are different, according to the debt capital markets team at the Royal Bank of Scotland.
At a recent roundtable run by the Royal Bank of Scotland, the question of where Australia’s residential mortgage-backed securities sector was heading was examined in some detail, with the consensus being structured deals are still struggling for acceptance among international investors.
The bank noted that the Australian Office of Financial Management’s residential mortgage- backed securities sector investment program, which commenced in October 2008, has, to date, seen the allocation of $20 billion in government funding to support domestic securitisation markets.
“So far, $13.3 billion has been invested by the Australian Office of Financial Management and, encouragingly, we have observed a reduced reliance on its support in 2011, with only $835 million of [available funding] utilised,” said Andrew Chick, head of debt capital markets at the Royal Bank of Scotland.
The analysis by Chick’s team showed that most of Australia’s big four banks issued residential mortgage-backed securities in 2011 with Westpac, the Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) all running deals that raised between A$1 billion and $3 billion each.
“These deals mark a return to the market following a four-year absence for both CBA and NAB,” the analysts at the Royal Bank of Scotland commented.
“The problem with the residential mortgage-backed securities sector, which is most of the [Australian securitisation] market, is that the asset class is tainted by the global financial crisis,” said Chick. “Investors globally feel that this sector has been the cause of a lot of their pain and they’re slow to get back into it.
“We are starting to see some quite large transactions being done in Europe – but at pricing that is a lot wider than in the Australian market.
“The performance of Australian mortgages through the global financial crisis has shown they are a lower risk and should command lower margins, but international investors can’t be convinced of that, at this stage.”
It has not been all negative news from residential mortgage-backed securities investors globally. Cross-border asset-backed securitisation and residential mortgage-backed securities issuance has started a post-crisis re-emergence of sorts.
The 2010 year saw the first Australian auto securitisation (US$500 million) placed into the US by Macquarie Leasing, which was also the first non-Australian-dollar denominated deal from an asset-backed securitisation issuer since 2008.
“In 2011 we have seen cross-border issuance continue in asset-backed securitisation with both Macquarie Leasing and Capital Finance Australia raising US$750 million and £120 million, respectively,” said Chick.
“One of the interesting dynamics is that the part of the offshore market which is working at the moment is the asset-backed securitisation market, particularly the auto [loans] market in the United States.
“Macquarie was able to fund inside where they’d be funding if they accessed the Australian market [through its recent SMART securitisation transaction]. Other automatic issuers are following.
“We have also seen the first offshore residential mortgage-backed securities deal with Lloyds issuing an Australian-dollar tranche to British investors in March.”
Additionally, he pointed out, ME Bank successfully issued a US$335 million residential mortgage-backed securities tranche.
Another important change in recent times is that asset-backed “kangaroo” activity has re-emerged in the form of covered bonds from offshore banks. These bonds are known as “covered kangaroos”.
“Since October 2010 the kangaroo covered bond market re-opened after a three-year absence and to date we have seen five deals from a range of Canadian, Norwegian and New Zealand banks,” noted the Royal Bank of Scotland.
Covered bonds legislation is expected to be passed by the end of 2011. Then it is expected that Australian banks will be on par with their New Zealand counterparts and begin using this funding tool to issue domestically and offshore into Europe and the United States.
The success of the Bank of New Zealand’s Australian dollar covered bond deal is a positive sign for the continued development of the Australian covered bond market.
“We’d expect to see quite a significant uptake of [Australian banks’] covered bonds, once the legislation is passed,” said Chick.
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- Capital Markets
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- AB+F, bkellerman@financialpublications.com.au
- Article Posted:
- July 15, 2011
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