Evolving securitisation: what to expect in 2022
Expert views on the year ahead from NAB’s market-leading securitisation team, recognised as Australian Securitisation House of the Year for the 10th year running at the 2021 KangaNews Awards.
The securitisation funding market is an ever-evolving space. Across both warehouse and term deal formats NAB continues to see new issuers, new asset classes, and innovation in funding structures to help borrowers and investors satisfy their funding and investment needs.
Here are some of NAB’s expert views on questions about what to expect for the year ahead.
What are the trends in warehouses over the past one to two years?
The market dislocation during the COVID-19 crisis saw issuers utilise warehouse financing to secure access to liquidity. As a result, various borrowers sought higher limits and larger undrawn components. As financial markets returned to normality in 2021, liquidity conditions eased, highlighted by the return of offshore banks after largely withdrawing during the crisis. The Omicron variant seems to have had minimal impact on asset performance to date.
The Australian Office of Financial Management’s (AOFM) Structured Finance Support Fund (SFSF) has played a critical role to plug the shortfall of mezzanine financing through the pandemic, with 45 warehouses receiving financing from the fund to date1. The subsequent rebound in economic and market conditions saw the welcomed re-emergence of mezzanine financing, and AOFM activity is not expected to increase this year.
Despite the COVID-19 disruption, warehouse financing at an aggregate system level in Australia has steadily grown in recent years. Key drivers for this expansion include: (i) growth of challenger non-banks and fintechs; (ii) innovation of new asset classes; and (iii) M&A activity through industry consolidation or ADI divestments.
Warehouses are obviously mostly private arrangements between financiers and lenders as the issuers, so there is a not a lot of public information available. Can you at a high level talk about the performance of warehousing arrangements, and particularly how they performed through COVID-19?
Across various asset classes, NAB observed stable warehouse performances. Notably, as COVID hardship arrangements rolled off through 2021, arrears continued to remain low.
The pandemic-induced market disruption demonstrated that warehouse financing plays a vital role in the financial system to incubate assets through periods of volatility. NAB took a front foot appropriate to partner with our warehouse lenders so they were equipped to manage the ensuing crisis. Pre-emptive measures to deal with hardships, combined with transparent relationships with various stakeholders (including the AOFM), played a key role in managing asset performances.
What do you think the next year in warehousing looks like?
Private capital mezzanine investors are expected to continue to replace the AOFM’s SFSF in 2022. At December 31, 2021, the SFSF had 12 warehouse commitments with approved limits of ~$490 million2. Last year saw the emergence of new domestic and international mezzanine warehouse investors and this trend is expected to continue in 2022. The expansion of the mezzanine finance investor base is critical to support the expected aggregate system growth of warehouse funding.
Warehouse funding will continue to act as an important incubator for fintech innovations. The Australian securitisation market pioneered the development of new assets classes (buy now, pay later for one) and this should continue in 2022. New assets classes that will look to utilise warehousing financing includes reverse mortgages, equity release, commercial property and SME.
Last year saw consolidation of certain segments and this trend is anticipated to continue. In response, warehouse financiers are expected to have renewed focus on change of control clauses pertaining to transaction documents.
Moving on to capital markets now – last year we saw A$47 billion of issuance from Australian issuers3, what do you expect for the year ahead and why?
2021 marked a record year in securitisation for public term issuance. The outlook for issuance remains robust, with non-ADI RMBS and ABS issuance expected to mirror last year’s volumes. The expiring of further drawdowns on the RBA’s term funding facility is expected to support further ADI term issuance in this coming year. In 2021, publicly available data shows ADI RMBS term issuance was $10 billion, up 74% from the prior year, however, still below the historical average ADI issuance of ~$15 billion4.
Since APRA’s announcement of the phasing of the committed liquidity facility (CLF) in early September 2021, new issuance RMBS spreads for senior “AAA” rated notes have drifts 25 basis points from their post-pandemic lows5. Expectations of a more volatile market backdrop in 2022 combined with the resumption of ADI issuance across various formats (including RMBS) has tempered market participant expectations of credit spreads retracing tighter, with downside risks that spreads may leak wider.
Encouragingly, primary market issuance to-date in 2022 has remained constructive in global markets. Investor diversity is expected to play an important role in 2022. Australian borrowers achieved record foreign currency tranche volumes in 2021 and foreign currency tranches are expected to play an increasingly important role to mitigate potential execution risks.
1, 2 https://www.aofm.gov.au/quarterly-sfsf-update-December-2021