Australian ABS and RMBS issuance saw record volumes of over A$8bn and A$37bn respectively in 2017, according to SCI data. The rise of fintech platforms, non-bank financial institutions and private equity-backed lenders in the country - combined with the global hunt for yield - is set to support continued growth of its securitisation market.

Private equity involvement in the Australian securitisation market began in 2015 when Deutsche Bank, KKR and Varde Partners acquired GE Capital’s Australian and New Zealand consumer finance business, renaming it Latitude Financial Services. The first public ABS issuance from that platform - a credit card deal - came in March 2017. Since then, RMBS issuers Pepper Homeloans, La Trobe Financial and Bluestone have received investment from or been bought out by KKR, Blackstone and Cerberus respectively.

Panellists at IMN’s recent Global ABS conference highlighted how the Australian securitisation market has benefitted from the injection of capital and experience by these private equity players. Indeed, multiple issuances are expected from their programmes over the next couple of years, along with the potential expansion of product types. Warehouse lines are also being extended to fintech companies in the personal loan and SME spaces, which could result in securitisation exits.

Jordan Batchelor, director, structured capital markets at ANZ Bank, said that the strength of the Australian securitisation market is attracting both domestic and offshore investors. “We’re seeing issuance right down the capital structure in RMBS, as the yield is attractive and worth doing the work.”

Fitch figures show that Australian 30+ day mortgage arrears increased by 12bp to 1.13% in 1Q18 from the previous quarter, although this is consistent with the seasonal increase in spending during the year-end holiday period and the rate remains 9bp lower than in 1Q17. Meanwhile, the conditional prepayment rate recorded five consecutive quarters at below 20%, reflecting increased refinancing difficulties due to a combination of tighter underwriting standards and regulatory restrictions on annual interest-only and investment-loan growth.

Batchelor noted that while there is a focus on whether there is a bubble in Australian housing, most observers don’t give enough credit to the fact that different regions have been performing differently in recent times. “For example, Tasmanian house prices have risen materially, whereas there has been some slow-down in Sydney and Melbourne – although increasing population and limited supply is likely to support demand for property in the long term within these cities. At the same time, stress in Western Australia from the mining downturn is flowing through, with this market potentially at a turning point,” he observed.

A stress test of Australian RMBS that Fitch conducted last month demonstrates the resilience of triple-A ratings across the segment. The agency ran a stress scenario similar to the Irish housing downturn in 2008, applying a default rate of 13% and a market value decline of 43% to its Australian RMBS portfolio over a three-year period. It also applied credit to lenders' mortgage insurance recoveries in line with criteria during the three-year stress period, but assumed that all RMBS ratings post the stress period reflected the LMI providers' being downgraded to triple-B.

Under the stress scenario, 78% of triple-A Australian RMBS ratings remained unchanged, with less than 1% downgraded to below investment grade. The downgrade of the LMI providers accounts for just under half of the triple-A downgrades, as Fitch does not apply credit to LMI for triple-A ratings when the providers are rated triple-B. The most resilient triple-A tranches were those from older vintages, which benefit from extra credit enhancement due to deleveraging since closing.

Looking ahead, the panellists noted that the market is awaiting the findings of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The commission - which was established in December 2017 - is due to publish an interim report by 30 September and a final report by 1 February 2019. The evidence presented by the commission so far points to the importance of strong compliance, reporting and governance frameworks for bank and non-bank financial institutions, as well as appropriate incentive structures to minimise potential moral hazard and conduct risks.

CS