The Australian residential mortgage-backed securities (RMBS) market continued its renaissance.

Friday, 30 June 2017

The Australian residential mortgage-backed securities (RMBS) market continued its renaissance in the penultimate week of June with two new deals issuing. Auswide Bank printed ABA Trust 2017-1 for A$300 million (US$231.2 million) on 23 June, a day after Columbus Capital (Columbus) netted A$500 million from Triton 2017-1.

The Australian market brushed off headline noise around the housing market to record a strong first half for RMBS issuance, with volume high and margins tightening. The last deals of H1 cemented the period as one characterised by strong demand for the asset class, with notable highlights being interest in mezzanine securities and the bid from offshore.

A total of A$17.6 billion of Australian dollar securitisation priced in the first half of 2017 – just short of the post-crisis record for the first six months of a year and almost halfway to a record for annual volume.

Demand persisted throughout the period, and Columbus’s most recent RMBS illustrates the increase in appetite. Triton 2017-1 added A$150 million to the volume of the issuer’s previous securitisation, from 2016, and shaved 35 basis points off its headline margin. The largest tranche of Triton 2017-1 priced at 120 basis points over bank bills.

Karl Sick, treasurer at Columbus Capital in Sydney, tells KangaNews: “It certainly is an interesting environment we are in. Locally, interest rates, population growth, the supply-demand equation and structural market features appear to have to contributed to robust growth in property prices. Investors both domestic and offshore have a healthy appreciation of the current market environment against a backdrop of globally low interest rates.”

Sick says that to help mitigate potential risks in the housing market, Columbus made sure its latest RMBS was based a portfolio of loans with a moderate loan-to-value ratio and loan size, a strong credit and serviceability regime and a metropolitan focus.

Demand and Columbus’s own funding requirements combined to secure the larger volume. He notes that the issuer’s 2016 deal printed in July, at exactly the same time as global markets were digesting the Brexit vote in the UK. However, he does not ascribe the price differential to this factor – instead noting: “Brexit was not as significant a driver of price as the broader market view of credit at that time.”

Offshore pull

Offshore investors were prominent in Columbus’s book, and data from the arranger, Westpac Institutional Bank (Westpac), show 40 per cent of the transaction being placed internationally.

James Kanaris, Sydney-based director, structured finance at Westpac, tells KangaNews there was strong demand from European investors. He adds: “There continues to be strong demand for Australian RMBS, not only domestically but offshore. Offshore investors certainly continue to see value.”

Sick explains that Columbus sensed solid appetite off the back of its recent investor roadshows in Australia and Europe. He comments, “Given where we have historically priced relative to the majors and market participants, I believe investors saw relative value in a portfolio with a strong credit profile with structural features to designed encourage both domestic and off-shore participation in the transaction.”

The Triton deal was structured to maximise interest from Europe. For instance, Kanaris reveals that it was designed to be compliant with Europe’s capital requirements directive IV. It also includes a shorter-dated tranche with a weighted-average life (WAL) of 0.3 years, a feature repeated from the same issuer’s 2016 RMBS.

Kanaris tells KangaNews the short tranche was included off the back of a reverse enquiry, which allowed the issuer to demonstrate its willingness to meet specific pockets of demand and facilitated a volume upsize.

Sick adds: “The primary rationale is economic benefit. We find that the economics are favourable on the basis the WAL on the A1-B notes does not push out materially beyond three years. The economic benefit is naturally in the initial 12-month period, but when multiplied over several transactions the cumulative benefit becomes quite significant.”

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