Aussie ABS scales new peaks
The Australian structured finance market has broken multiple annual records, including overall issuance volume, which surpassed the long-standing 2006 total set just prior to the global financial crisis.
Over A$70bn (US$46bn) has been printed year to date, including A$53.5bn of RMBS and A$11.6bn of auto ABS – both annual bests – while A$3.9bn has been raised from credit card, personal loans and buy now, pay later backed offerings, according to Westpac.
Despite these huge volumes, spreads have compressed, especially across junior tranches, which are clearing at all-time tights.
With interest rates on a downward path, dampening investor returns, there are doubts that the market can maintain its current strength, but fund managers and analysts are confident of a bright future.
Phil Strano, senior credit portfolio manager at Yarra Capital Management, which has A$22bn of assets under management, expects the structured finance market to remain strong in 2025, underpinned by rock-solid asset pools, especially for RMBS, and still compelling returns.
“If you focus on housing, Australia has very low unemployment and a scarcity of housing, while projected interest rate cuts are set to strengthen household balance sheets. You can never say never, but we typically see any weakness in the RMBS market as a buying opportunity.”
The next biggest sector, auto and auto equipment-backed ABS, is also buttressed by strong fundamentals.
“Our outlook for Australian auto ABS remains stable, supported by relatively stable employment trends,” wrote S&P as it reported a drop in auto pool arrears in September from August’s already very low 1.35% to 1.31%.
Strano noted the scaling back of official interest rate cut projections as a further positive from a buyside perspective.
“The market is currently pricing in around 50bp of RBA cuts through 2025, which is down from 150bp just two months ago. If you take this viewpoint then yields are going to remain at pretty attractive levels for investors, particularly in historical terms,” he told IFR.
“Senior tranche RMBS spreads have settled in the low 100s area, which is roughly double where they were in 2021 and about three times their pre-GFC levels.”
For relative value investors, Triple A RMBS/ABS tranches offer a decent pick-up over the circa 70bp margins for major bank, Double A rated senior three-year notes, while a long-standing RMBS weakness – low secondary market liquidity – has improved.
“We are also seeing a lot more liquidity and a lot more counterparties which has helped secondary turnover in RMBS exceed that for bank Tier 2 notes in 2023,” Strano said.
The amortising nature of securitisations is another reason to expect elevated levels of supply next year, according to Strano’s colleague Roy Mao, a credit analyst and investment manager.
“Given the way Triple A RMBS and ABS are structured, investors always get monthly payments and that amortisation creates a natural demand for investors to stay invested and therefore a need for new deals constantly,” he said.
Here to stay
Elevated foreign appetite for Australian structured finance products is not expected to decline in the foreseeable future, according to Martin Jacques, head of securitisation and covered bond strategy at Westpac.
“Offshore interest has picked up, particularly among Japanese investors who a decade ago would usually only gravitate towards major-bank RMBS, but are now accepting of all asset types from non-bank originators,” he said.
Jacques also pointed to increased European and UK interest thanks to the greater volumes on offer and the easily identifiable relative value benefits, notably among auto ABS.
He cited Volkswagen’s multi-currency ABS programmes and the BBSW plus 115bp clearing margin for the senior tranche of the A$750m Driver Australia Ten ABS in September.
Earlier in the month, the £358.8m (US$463m) Class A note in the Driver UK 9 STS prime auto ABS priced 60bp wide of SONIA which would have swapped back into Australian dollars at BBSW plus mid 70s.
As far as newer asset classes are concerned, Jacques sees potential for further activity in the reverse mortgage/equity release segment as well as in solar panel/battery storage receivables that have previously been included in consumer receivable ABS, but he doubts there will be much CMBS activity beyond the small ticket/SME CMBS trades seen in recent years.
"Prior to the financial crisis there were some large office-backed CMBS issues, but these are not front of mind at present, especially given the negative headlines we have seen in this space for UK and US CMBS. However, potential big-ticket CMBS supply may come from new segments such as the rapidly evolving data centre sector," he said.
In terms of what could reduce future supply, Jacques suggested banks will continue to strategically use securitisation markets, weighing up cheaper funding markets, notably senior and covered bonds, at home and abroad, along with any capital benefit that can be attained for off-balance sheet trades.
“With a structural change in some components of the lending market that has seen non-banks prosper in auto, equipment, unsecured consumer, and near-prime mortgages, it is difficult to see what will slow non-bank supply other than a global credit event,” said Jacques.