Moderated by Jennifer Hellerud, Director and Head of Securitisation (Australia) at RBC Capital Markets, the panelists at the Australian Securitisation Forum’s (ASF) Market Perspectives 2021 briefing reviewed the challenges of 2020 and surveyed the 2021 landscape for securitisation markets in Australia and Europe.
Australia’s response averted ‘gridlock’ in 2020
Australia’s response to the COVID-19 pandemic was “appropriately swift and massive” as authorities implemented three pillars of support in the Structured Finances Support Fund (SFSF), the Term Funding Facility (TFF) and repayment deferrals, said panelist Ken Hanton, Director - Corporate & Institutional Banking at National Australia Bank.
The SFSF was effective in ensuring the non-authorised deposit-taking institutions (non-ADI) sector had access to funding through a potentially troublesome time. Non-ADI securitisation issuance set a post-global financial crisis record of A$20 billion in 2020, while non-conforming Residential Mortgage-Backed Securities issuance was up 17% to just under $10 billion and prime RMBS market issuance was up 16% to top $10 billion.
“When things became gridlocked the SFSF was put in place and basically unlocked the market,” said Hanton.
“There was clearly a multiplier effect and without it, the market would have stayed locked a lot longer and we probably wouldn’t have had the volume of issuance.”
The TFF was not put in place to support securitisation per se but it had the effect of facilitating lower rates into the real economy. It also had a marked impact on reducing ADI (Authorised Deposit-Taking Institution) issuance, not only into the securitisation market but also senior unsecured markets.
“With a scarcity of supply of credit coming from the banks married with the fact that interest rates are now effectively zero, I think that’s been the big driver in spreads in the Australian market and indeed other markets as well in 2020,” said Hanton.
Repayment deferrals had proved effective in preventing more distressed housing stock from coming onto the market in 2020, which also played into securitisation’s favour.
Booming secondary market in Europe fuelled by high liquidity
Similar to Australia, the European Central Bank’s Targeted Longer-term Refinancing Operations (TLTRO) and Pandemic Emergency Purchase Programme (PEPP) provided liquidity support for securitisation and other asset classes in the EU. The ECB support for securitisation was concentrated during the March-April 2020 period when illiquidity was quite significant. However, for most of the year, the central bank’s purchases of asset-backed securities were negative.
“That in a way helped arrest the significant spread-widening that could have happened,” said panelist Alexander Batchvarov, Head of International Structured Finance Research at Bank of America Merrill Lynch.
While private-label securitisation supply declined about 25% year on year in the EU, synthetic securitisation supply remained robust, with some 40 transactions worth about US$80 billion recorded in 2020.
A notable development in the EU was the booming secondary market, mainly in the high beta sectors. The CLO (collateralised loan obligation) market was 1.4- 1.5 times larger in 2020 year-on-year. The non-conforming UK RMBS (retail mortgage-backed securities) market also expanded.
“It seems to be suggesting that there was liquidity in many respects, and more than we expected in 2020,” said Batchvarov.
Banks to retreat from prime RMBS market in Australia in 2021
In Australia, securitisation issuance volume in 2021 is expected to be comparable to 2020 and driven mainly by non-ADIs. The major banks are unlikely to contribute much issuance due to the TFF, which will operate until June 30. They also have less incentive due to a reduction in proposed risk weights for mortgages announced by the banking regulator in December, 2020, and the deferral of Basel III standards to 2023, said Hanton.
With banks not in the market to any great extent, non-banks will have the prime market largely to themselves and there is plenty of money to put to work. Very low interest rates and the global weight of money may allow for further spread compression in 2021.
“We’ve seen most of the spread compression in 2020 but there could be a little bit more to go,” said Hanton.
Europe issuance unlikely to meet demand in 2021
In Europe, securitisation issuance volume is expected to rebound 10-15%, but not enough to offset an anticipated plunge in corporate bond supply, said Batchvarov.
Spread compression is seen in multiple markets, including the Netherlands, where retail mortgage-backed securities are being offered at 13-15 basis points.
“So the supply, even though it will increase a bit, is nowhere near where the demand is and the lack of other supply is probably driving investors towards Australia and I would say, the UK and potentially China,” said Batchvarov.
European demand has been noted in a sudden surge for prime products from the UK and Australia.
Strong international demand for structured products may offer opportunities for Australian issuers, particularly in the United States, United Kingdom and Japan.
“UK investors will probably be looking also abroad,” said Batchvarov.
“There is not much Europe can offer in terms of volume and in terms of spreads. So they will probably be targeting some investments in Australia as well.”
