Securitisation 2007: Safe as houses
It may be predictable and even bland, but the Australian securitisation market is generating issuance volumes unmatched by any other country in the Asia-Pacific (ex-Japan) region. Moreover, nothing looks likely to stop this supply dominance in the near future, especially given the continued overwhelming investor interest. Shankar Ramakrishnan reports.
In the last few weeks, the Australian securitisation market has turned sizzling hot, with almost A$14bn (US$11.5bn) of MBS paper being sold globally. Demand is so overwhelming that spreads are expected to tighten to record levels and upcoming issue sizes consequently expand to an unprecedented degree.
“We are looking at a gradual compression in spreads being paid by Aussie MBS originators,” said Stephen Maher, head of credit research at Macquarie Bank. “There is no fundamental credit reason for spreads to widen, and investor confidence about Aussie mortgage credit quality is at a new high.”
The Australian securitisation market has been growing in leaps and bounds in the past few years. In 2006, the Aussie RMBS market experienced record issuance volume as A$52bn of securitised paper was sold down to investors.
In the first few months of 2007, the consistency of issuance flow has been maintained and this sustained flow has been accompanied by a tightening of spreads. This is happening because of increasing faith among European investors about the quality of the underlying collateral at a time when in other regions – notably the US – collateral quality has become a major issue.
Strong European investor interest has not been just for global transactions but also for Australian dollar-denominated RMBS, which has become a major factor contributing to the successes of Aussie RMBS.
Recent deals have also been hugely oversubscribed, even at these seemingly ever tighter spreads. Case in point was the overwhelming investor response to Suncorp Metway's A$2.5bn (US$2.05bn) equivalent global RMBS via its Apollo vehicle which priced at the end of April. The company competitively priced and upsized its RMBS through joint leads ABN AMRO, Macquarie and SG. All the tranches, including a euro-denominated tranche, were upsized significantly from their original sizes, reflecting huge investor confidence in Aussie collateral.
“It was an outstanding result because the deal was heavily oversubscribed and investors were scaled back by around two times at the closing level. It doesn't get any better than this,” said one banker.
Some bankers saw this as the sign of things to come, because of huge reinvestment cash flows. Constant prepayment rates on Aussie RMBS are hovering around the 25% annual level and this means that prepayments on a monthly basis could be about 2% of outstanding issuance of A$140bn. This means that investors are flush with funds and looking to invest. And they have been doing exactly that. A string of deals sized in excess of A$1bn have been oversubscribed since the Apollo transaction and there seems no end in sight for this investment interest, at least at the moment, according to bankers.
Ironically, this acceptance of tightening spreads comes even as a rating agency studies have revealed that the risk profile of Aussie MBS is increasing.
The rise in delinquencies to the highest levels on record was confirmed in a recent report from Moody’s. The report’s author, Moody’s analyst Philip Wong, said that delinquency rates were drifting upwards as record indebtedness and recent rate rises continue to put stress on borrowers’ ability to service their debt.
That said, the delinquency numbers are still remarkably low. Wong said that during the fourth quarter of 2006, average delinquencies greater than 30 days past due on prime and low-doc mortgages increased, though only to 1.17% from 1.13% in the third quarter. October, November and December recorded month-on-month delinquency numbers of 1.09%, 1.16% and 1.26%, respectively.
The fact that Aussie macroeconomic fundamentals are still very strong meant that this small rise in delinquencies is hardly going to have an impact on the performance of Aussie RMBS, argue bankers. In addition, on a global perspective, the Australian numbers are still miniscule – approximately half of the rates in the UK, for example – and delinquencies usually rise in December due to seasonal factors such as Christmas-related spending as borrowers typically experience short-term stress on their cashflows.
Bankers are now hoping that the current surge of supply carries with it innovation that will further the cause of the market as a whole.
The Australian securitisation business has traditionally been dominated by RMBS deals. These accounted for over 70% of the record A$70.65bn of securitisation volume in 2006, but that was a lower percentage than in the past, and the product’s dominance should continue to lessen as a variety of ABS deals come to market.
So a greater diversity of collateral and issuers – and even the occasional structural innovation – are expected this year.
“This year we hope to see the Australian structured finance market taking a giant step towards gaining more depth and maturity,” said one fund manager. “Investors would like to see a greater diversity of issuers . . . we want something beyond the rather vanilla insured RMBS.”
ABS issuance is expected to grow significantly in 2007 thanks to a strengthening of interest in residual value, whole business and esoteric securitisations.
“The recent boom in private equity activity is likely to lead to an increased focus on the use of structured finance techniques in rebalancing or regearing corporate balance sheets,” said Moody’s in a recent report.
A surge of CLO issuance from Aussie banks is also expected, and the market is likely to see a continuation of the increase in autoloan transactions, lease-backed deals and small ticket-receivable deals. Furthermore, new asset classes likely to come to the market this year may include reverse mortgages.
“There is bound to be an increase in non-RMBS type of transactions but they will still be at the margin. Prime MBS will continue to remain the core product of this market,” said a banker.
There have already been some interesting transactions that seemed to suggest more ingenuity. The first Australian securitisation of the year – an A$2bn-equivalent multi-currency RMBS from Challenger – broke new ground as it featured for the first time a short tenor euro-denominated senior tranche and a sub tranche that was denominated in euros instead of the usual Aussie dollars. That twist helped the deal, jointly led by Deutsche Bank and RBS, garner strong investor interest.
Similarly, a deal priced in February via an SPV called ConQuest 2007-1 Trust is worthy of note because it introduced a new class of issuers to the structured finance market – credit unions. The A$331m deal, led by Commonwealth Bank of Australia, securitises a portfolio of mortgage loans originated by Connect Credit Union of Tasmania and Queenslanders Credit Union – the first time credit unions have issued prime RMBS instead of funding through CP conduits.
The pool backing Conquest 2007-1 MBS comprises 2,494 loans, 11.9% of which are interest only and 9.1% are low-documentation loans, with a current weighted average LTV of 63.5%, 26.75-month seasoning and geographic concentration in Tasmania (69%). About 90% of the transaction was taken by domestics while Asian and Europeans took the balance.
In the car loan sector, Macquarie Leasing priced and upsized a record A$1.7bn autoloan ABS in March, and said it planned to pepper the market with deals on a regular basis.
“The company has a portfolio of A$3.5bn and the plan is to securitise this over the next 12 months or so,” said Adrian Bentley, head of debt finance at Macquarie Debt Markets, the arranger and structurer for Macquarie Leasing’s latest deal.
“We are laying the groundwork for regular funding forays through the latest issue which is the largest Australian dollar auto and equipment securitisation and is expected to set a benchmark for the sector . . . Lease origination is about A$150m a month and that should support a regular issuance programme."
The deal, which came via an SPV called Smart Series 2007-1 Trust backed by autoloans and equipment receivables attracted participation from over 30 investors and all four tranches on offer were oversubscribed.
And there is more innovation on the way. Aussie MBS investors have been given a chance to get their hands on an RMBS which is backed by a unique set of collateral.
Macquarie Securitisation launched in mid-May, via joint leads Macquarie Bank and SG, a A$750m RMBS that is backed solely by mortgages with an original LTV of between 95%-100%. Coming through Puma Masterfund H-1, two tranches are being offered, including A$660m in As (rated Triple A by Moody’s and S&P) with a 2.9-year WAL and a A$90m in Bs (Aa2/AA) with a 4.4-year WAL.
The weighted average current LTV is 96.6% and weighted average seasoning is nine months. The maximum loan-to-value ratio of loans in the pool is 100%. All borrowers within the pool have had their income fully verified and have a clean credit history. The loans carry primary mortgage insurance provided by either Genworth Financial or PMI, and the bonds will be exempt from interest withholding tax.