A further slowing in growth
Securitisation has been one of the compelling stories in the Australian market in 2017. Issuers are keen, investors are willing and there’s abundant appetite for new and exciting assets and structures.
Confidence is up in Australia’s securitisation market. As of mid-October, the volume of mortgage- and asset-backed securities had already reached a post-global financial crisis (GFC) high of $36 billion.
As an industry leader, NAB has participated in more than 90 per cent of the year’s deals to date. The bank’s director of securitisation originations, Lionel Koe, is confident the total volume will increase still further before year’s end: “We’re currently live on a couple more trades and there remain a few in the pipeline, which will see a strong close to 2017.”
It’s a whole different story from 2016.
“Last year credit markets were relatively volatile which, coupled with low credit growth, resulted in subdued issuance volumes. The tide has certainly turned this year,” Koe says.
From an origination perspective, the cumulative effect of macro-prudential tightening and market volatility resulted in issuers delaying or reducing their secured funding tasks in 2016.
However, 2017 has seen a turnaround. For one thing, residential mortgage-backed securities (RMBS) credit spreads have contracted significantly and the product has been strongly supported by both domestic and offshore accounts, Koe points out.
Regulatory changes are also influencing the types of deals Australia’s major banks are doing. Since the GFC, the majors have used securitisation for funding-only transactions. But the implementation of the net stable funding ratio (NSFR), revised mortgage risk weights and changes to Australian Prudential Standard (APS) 120 have seen them change their use of securitisation, Koe says.
While there were some initial concerns about the impact of increased supply of mezzanine and subordinated notes into the market, it in fact did the opposite.
“What’s been really positive is that as the majors brought funding and capital-efficient trades, we’ve seen new and existing mezzanine and subordinate investors materially increasing their appetite for these notes, opening up the market and promoting liquidity.”
The market has also been buoyed by overseas investors – notably those from the United Kingdom and Japan.
“This year certainly saw the emergence of an active and sizeable bid from Japan after an extended industry courtship with a number of existing and new accounts supporting transactions in meaningful ways across the capital structure,” Koe says.
“It’s been really pleasing to see our investment in the region pay off. We’ve actively engaged investors outside the pressures of live deals with regular regulatory, market and credit updates coupled with issuer due diligence and deal-specific engagements.”
NAB Securitisation has been at the forefront in terms of arranging and lead-managing innovative deals. In fact, NAB arranged one of the most innovative transactions this year: Bank of Queensland’s (BOQ) €500 million (A$743 million) conditional pass through (CPT) covered bond, a first in the Asia-Pacific region.
The structure provided clear upsides to both the issuer and investors. As its name suggests, the CPT structure means that upon an insolvency of the issuer, noteholders are repaid via the orderly paydown of the underlying assets and aren’t subject to a forced sale of the pool typical of hard-bullet or soft-bullet covered bonds.
“The methodology borrows RMBS technology and is correspondingly less reliant on the rating of the issuer,” Koe says. “In fact, from a Moody’s perspective, the structure is completely delinked from the rating of BOQ, while noteholders benefit from a four-notch buffer from Fitch’s perspective.”
The transaction was well received by European accounts, which are familiar with the structure. “Within 1½ hours of launch, books were north of €1 billion, enabling us to close books and price relatively quickly. Importantly, the transaction also diversifies BOQ’s investor base, which was one of the objectives,” Koe says.
NAB was also a joint lead on Latitude Australia’s inaugural $1 billion issuance under its Credit Card and Sales Finance Master Trust in April 2017. It represents Australia’s first credit card and sales finance receivables established under a master trust structure.
The transaction was very well received, particularly by the offshore investors (in the UK, Europe and Asia) who were familiar with both the structure and asset class. It also provided diversity away from RMBS, which was well received by the market.
The level of interest generated oversubscription levels ranging from approximately three to seven times, easily supporting the upsize and facilitating tightening of margins across the capital structure.
In the absence of geopolitical risks, Koe is quietly confident that conditions will remain positive in Q1 2018, with a number of issuers already exploring potential issuance windows.
But he adds: “A number of Authorised deposit-taking institution (ADI) issuers are long liquidity – a combination of subdued credit growth and active issuance in 2017 – which may see reduced deal volumes or smaller trade sizes in 2018 despite a positive funding backdrop.”
For global business solutions, contact Lionel Koe, Director Securitisation Originations +61 400 083 794 or via email at email@example.com
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