IFR Asia, February 2010
Few parts of the world financial markets were harder hit than securitization in the global financial crisis. Across the world, deals dried up: the practice of pooling of securities into single instruments received a lot of the blame for starting and exacerbating the crisis, and even as investors returned to debt instruments, they tended to steer clear of anything complicated.
But there are signs of revival in the securitization markets in the Asia Pacific region. This is so far chiefly an Australian story rather than a regional one, but practitioners are hopeful that as Australia demonstrates a way back to liquidity, issuance and reasonable pricing, other nations in the region will follow.
In Australia, the revival of the markets has been underpinned by the Australian Office of Financial Management, a specialist agency of the federal government with responsibility for Australian government debt. In September 2008, as the crisis bit, the AOFM announced plans to invest up to A$8 billion in Australia’s residential mortgage-backed securities (RMBS) markets by purchasing issues in order to support competition and provide liquidity. By December 2009 it had invested A$7.753 billion of that in 20 RMBS issues, with other investors, encouraged by the government’s involvement as a cornerstone investor, putting in another A$3.611 billion in the same deals. According to the government, that program financed mortgages over more than 62,000 Australian residential properties in Australia with an aggregate value of about A$17 billion. That first package was, as Tim Galt, director for asset backed securities at UBS, says: “a welcome lifeline for the market.”
The big question, once that funding was used up, was whether the government would come back. The answer came in October 2009, when the Treasurer, Wayne Sawn, pledged another A$8 billion to purchase RMBS, this time with a focus on supporting lending to small businesses and “lenders who have been largely or wholly reliant on securitisation markets to fund mortgage lending.” They had a January 15 deadline to lodge proposals, and six were received; after evaluating them the AOFM has agreed to invest in five of them, from AMP Bank, Firstmac, Liberty Financial, Members Equity Bank and Resimac, with an aggregate investment of up to A$3.4 billion. In other words, it’s the non-banks – those that were not covered by the government guarantee during the financial crisis.
While the government was considering its second program, the markets improved so much that several RMBS deals were successfully completed without needing AOFM funding. The most notable was SMHL Securitisation Fund 2009-2, backed by Members Equity Bank, a A$1.25 billion landmark (upsized from A$500 million) launched in September 2009. Only the second RMBS deal done without a cornerstone contribution from AOFM, it attracted 20 investors, some of them foreign fund managers. With Macquarie Bank as sole arranger and Commonwealth Bank of Australia and Deutsche Bank as joint lead arrangers, the deal stood out for its size and the demonstration of confidence in the market.
That confidence has been demonstrated again with a still bigger deal for Westpac, which raised A$2 billion in an RMBS deal in December, again without AOFM involvement. Entitled Series 2009-1 WST Trust, it was self-led and, at 130 basis points over one-month BBSW for a triple A-rated tranche with a weighted average life of 2.6 years, it brought the cost of funds into line with that payable on Australian government-guaranteed offshore bonds for the big four banks.
Kevin Lee, division director at Macquarie Bank, calls deals like Members Equity “a real watershed, giving the market confidence that things are recovering and getting to a self-sustaining footing.” Galt at UBS adds: “The best examples of how the market is starting to revive itself are the new issues that have been executed without AOFM sponsorship. It is a very positive sign to be able to launch and price a meaningful RMBS transaction without small to no government sponsorship.”
More than that, the new deals demonstrated a strong third party investor bid for RMBS. “What suggests that the market is emerging is that primary markets are pricing flat or competitively to secondary markets for Australian dollar denominated RMBS,” says Galt. “How we’re reading that is that investors can’t get bite sizes in the secondary market as large as they need and so they have to come to primary issues to get that volume.”
The success of these deals begs the question: was there any need for further government involvement in the market? One banker says: “I’ve got to say, when it first came out, it looked like it was a bit pre-emptive and not really required. I would have preferred to see the market shoulder more by itself.” But a closer examination of the difference between the two programs means that most bankers are glad it’s there as a spur to diversify the range of issuers. As Lee puts it: “Although we are starting to see standalone deals, it doesn’t mean every issuer can do a standalone transaction. It’s important for market confidence that they know the government is there and supporting in this transitional phase.”
“It sends a very positive signal to the market,” argues John Claudianos, managing director in the global asset securitization group at Deutsche Bank. “It says we are going to see continuing government support for the issuers and originators outside of the major banks, who look after the sector of the community that has needs for business-related mortgages.” It was part of the bidding process that applicants had to demonstrate they weren’t only going to support residential mortgages but also those with an emphasis on small business lending. “It allows those originators to know that funding will be forthcoming,” Claudianos adds. “Previously they didn’t have the confidence to go in with a campaign to originate mortgages because it was unknown to them whether there would be support when they got to financing.”
“The measure here is not to alleviate a legacy mortgage problem,” says Claudianos adds. “It’s the forward outlook of originating new mortgages and making sure the originators know they’ve got funding.”
For its part, the AOFM explained its decision in a January announcement. “Investor sentiment has improved in Australian RMBS markets since the inception of the program, especially in recent months,” he says. “Some RMBS issuance has been possible without AOFM support. However RMBS markets continue to be affected by the fallout from the global financial crisis and will need to improve further to support affordable new issuance from a broad range of lenders.”
The AOFM did make some changes to its methodology between the two programs, shifting to two platforms: a reverse enquiry approach, and the ‘pipeline’ mandates outlined above. “Any securitization issuer in the Australian market can now apply for a specific deal to see if the AOGM is keen to support it under the reverse inquiry platform,” Lee says. “For those five issuers announced to have mandates under the pipeline platform, it tells them they have AOFM support through 2010 and we can expect a range of deals from them.”
Structurally, unsurprisingly, there’s little that’s new here: straightforward RMBS deals are the way to go. So far deals have been in Australian dollars only rather than the dual-currency deals commonplace three years ago, but they are likely to return in time. Bankers also report that the investor base is very similar now to what it was pre-crisis, although some new professional accounts have arrived. “We didn’t have the SIVs,” says Claudianos. “The Australian dollar tranches were always real money investors, fund managers that did not have a SIV type funding problem and so didn’t disappear. 80% of the investor base that used to be there is still there.”
Australia is all about RMBS: the quality of collateral is famously high, reflecting both the strength of regulation and the strong cultural link between Australians and physical property. “I don’t think that dynamic has changed,” says Galt. “The collateral we’ve seen come to the market since late last year has been very strong. People are well aware of the necessity to bring very well seasoned pools with high quality borrowers.” Claudianos agrees. “The quality is superb,” he says. “The seasoning of these pools has been on average 30 months.” Defaults on prime mortgage pools in Australia, which in the good times are normally 1% or a little lower, peaked at 2% in January 2009 and currently stand at around 1.4%.
The next question is when the market diversifies into other sources of collateral. It could be a while. “The core funding facility that an Australian family has is centred around the home loan,” says Claudianos. “In the US you grow with auto companies offering so much competition they give a great package and so need to get funding from the securitisation markets – that doesn’t happen here. And there’s no specialist credit card lenders to do those deals. I think it’s going to be 95% mortgages here.”
Consequently it’s likely to be a while before deals extend into other underlying classes. “CMBS has been quieter,” says Lee. “The cloud that has been hanging over the head of that asset class has been the refinancing risk in some of those structures. But sentiment in that sector has been improving as well as we have seen some CMBS deals refinance recently and we could see more activity this year.”
Outside Australia, deals are rarer; a recent deal from India’s IFMR Capital, backed by 42,000 micro-loans from microfinance lenders, was a good sign but it was worth just Rs308 million, or US$6.68 million. At the time of writing, all eyes were on the Philippines, where a planned Ps40 billion deal from Power Sector Assets and Liabilities Management (Psalm, the power utility) was halved and delayed in December; it’s not yet clear how, when or where joint leads Standard Chartered and Development Bank of Philippines will place the deal. If it does, it will be a shot in the arm for the markets, a real sign that asset-backed deals are alive and well in Asia.