Monday, 22 October 2018

Securitisation 2005 - Locals should reconsider

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Australian RMBS spreads have reached their narrows and are unlikely to dramatically widen any time soon. Given the prospects of a A$24bn liquidity boost due to bond maturities and coupon payments, domestic investors should consider shedding their recent aversion to the product. At least that is the view of many bankers, as Shankar Ramakrishnan reports.

The spread-tightening in Australian MBS over the past six months has been dramatic – so much so that many domestic investors fail to see good value on offer and have taken a back seat to European and Asian buyers. Australian investors' participation levels have accordingly sunk to alarming lows.

Many on the buyside locally are hoping that once the current offshore mania for Aussie MBS passes, spreads will return to more “normal” levels and they will therefore be able to re-enter the market.

But is that a realistic expectation? Not according to some bankers, who argue that the tightening is not the result of a fad but rather a recognition on the behalf of overseas investors of the strengths of Aussie MBS.

“The asset class has an enviable track record in relation to its performance,” said Matthew O’Hare, treasurer at Macquarie Securitisation. “Underlying collateral performance is amongst the best in the world – as is its ratings stability – making Australian RMBS a very attractive defensive asset class. These features are combining to attract greater interest from an ever-increasing number of offshore investors.”

Local investors grouse over limited value in investing in a product where lower rated subordinated notes were pricing at levels where Triple A senior notes were sold six months ago. Some Aussie investors took the extreme step of altering their investment portfolios away from Australian RMBS, while others became much more selective.

The first casualties of this effective boycott were Commonwealth Bank of Australia’s A$4.2bn (US$3.3bn) Medallion Trust and Westpac’s A$1.8bn Series 2005-1G WST Trust in early 2005.

Only three Australian investors took part in the former and around five in the latter, even though both deals had Aussie dollar tranches along with pieces in US dollars and euros. About 20% of both deals ended up in Australia.

Both transactions were in the end driven by offshore investor interest, especially from Europe, as they were still perceived to pay yields – albeit at record lows in the Australian context – that were attractive compared with those available in Asian or European markets. Some bankers estimated that the differential between Australian MBS and European MBS was about 10bp–15bp, but has narrowed in the last six months to almost equilibrium.

And this narrowing of differentials is unlikely to lead to an end to such investor demand, said bankers. In fact, they noted, offshore investor interest is increasing in fervour with every deal.

Their interest has now moved on from just the US dollar and euro-denominated tranches to the Australian dollar-denominated version, a departure from the past when the currency factor limited such moves.

“There is a growth of interest among the offshore investor base for the Australian dollar-denominated tranches, reflecting more confidence in the asset class and currency, which means this current appetite for Aussie MBS is here to stay,” said Kevin Lee, division director at Macquarie Bank.

So before more investment opportunities are lost, it probably is time for a mindset change among domestic investors.

“The domestic investor base is very important for issuers, and though they would like them to be in their deals, they can’t pay up unnecessarily when there is great demand from offshore investors – which enables them to achieve a more cost-effective funding solution,” said one banker.

Pricing was also not all that bad. “Relative to global markets, top quality Australian MBS still offers a relatively better yield – a reason you still can see offshore investor interest. So if investors are looking to invest in MBS, there is still value on offer.”

Some domestic investors seem to accept this argument by showing support for recent Australian RMBS. But this mood is still circumspect and focused on deals which had more aggressive pool characteristics – and thus relatively better yielding than the double-insured, high quality pool RMBS from the Australian bank majors.

Liberty Financial’s non-conforming and sub-prime Series 2005-1 Trust RMBS in February saw almost 75% of the issue being taken by domestic investors, while First Mortgage Group’s 100% stated income loan backed MBS saw 50% going to local hands.

But this reconciliatory mood is yet to gain strength. Macquarie Securitisation’s 100% stated-income backed MBS in May saw only 25% participation from domestics while Adelaide Bank’s stated-income loan backed RMBS saw 15% of the notes staying at home.

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