According to a panel at the recent Australian Securitisation 2023 Conference, Australia's auto finance market has been going through a period of significant transformation this year, with new entrants, new funding sources and exponential growth in the take up of electric vehicles (EVs).
Jennifer Hellerud, Managing Director, Head of Securitisation, Australia at RBC Capital Markets, observed that the past 12 months have seen an unprecedented number of issuers in Australia’s auto financing asset-backed securities (“ABS”) space, many of whom are already challenging traditional lenders.
“Just this year, we've seen around 15 auto and equipment finance asset-backed security issuers coming to the public market”
Jennifer Hellerud, Managing Director, Head of Securitisation, Australia
“Together, they represented about $10.3 billion worth of public issuance this year to date, accounting for around 22% of all public issuance in the securitisation market.”
Hellerud highlighted that the trend is driven by banks shedding non-core and capital-intensive assets, but also by non-banks' service model propositions focusing on dedicated lending offered by specialists in this sector.
The result is that there is now greater competition in Australia’s auto and equipment-financing market through more customer-centric models offered by the non-banks.
A resilient lending environment
Hellerud also observed that early 2023 was characterised by volatility in global debt markets, due to the collapse of both Silicon Valley Bank and Credit Suisse. She noted that this led to the market closing for a couple of weeks and some deals being postponed. However, Hellerud observed that since then, issuance has been well-supported and that Australia’s auto finance-backed ABS market continued to grow.
Issuers have spent time with investors to understand their business models, product offering, lending standards and historical performance. The continued sound performance of the collateral has also provided investors with a great deal of comfort. Notwithstanding this, extensive pre-placement and private placement activity has continued following the earlier volatility in the year.
EV growth creating new opportunities
A significant portion of the panel’s discussion focused on the rapid growth in EV financing. Changes to Australia’s fringe benefits tax (FBT) regulations introduced in 2022 provided significant advantages to EV owners who acquired the vehicles via a novated lease.
This has encouraged greater EV take-up across Australia, and has further stimulated the auto financing market, encourages car buyers to finance their purchases rather than buying outright. Many borrowers who have already taken advantage of the new tax break are salaried employees whereby repayments are made from their pre-tax income, making them an attractive proposition to lenders. Non-bank lenders in particular have been quick to respond to this.
That said, the EV market's relative infancy presents its unique challenges. The panel highlighted the uncertainties in estimating residual values of EVs and gauging the depth of the second-hand market. Despite this, they were confident that any risks were manageable in light of the high credit quality of EV borrowers and low default rates observed to date.
The panellists also observed that the auto finance market had been adapting to Australia’s EV boom, with new financing strategies and product offerings. Lenders and investors have been recalibrating their approaches to accommodate the growing demand in this segment, indicating a dynamic response to the evolving market conditions.
While the growth in EV financing introduces new complexities, the overall sentiment among the panellists was one of optimism. They acknowledged the challenges but remained confident in the sector's potential.
The panellists observed that EV financing wasn’t just a market trend, but something that aligned with a broader emphasis on sustainability in investing.
An evolving investor base
The panel also discussed the evolving investor base for Australian auto financing, which increasingly comprised both domestic and international entities. However, more commonly both domestic and overseas funders are asking for more detailed information about emissions.
Global economic factors, including interest rate changes and geopolitical events, have been influencing the amount of funding available to Australia’s auto finance market, with capital flows often coming as a result of Australia’s perception as a safe haven. The product also offers an attractive relative value proposition for domestic and offshore investors alike and collateral performance remains sound.
Another factor encouraging new investment has been the growing size of issuance volumes, in the form of more frequent and larger transactions. Increasingly, this means deals backed by Australian auto collateral tended to meet the minimum size requirements of larger offshore investors.
The panellists noted that generally, Australia was regarded as a stable and low risk environment for lenders. It still tended to be somewhat insulated from many global events, and this was likely to work in its favour during periods of global uncertainty. These elements underscored the interconnected nature of the global economy and its impact on Australia’s lending environment.
“I do think that the international investor community has an appreciation for the fact that Australia and the Australian securitisation market is somewhat insulated from global dynamics, whether it be the conflict in the Middle East or the sell-off of 10-year treasuries or a softer equity market, for example,” Jennifer Hellerud observed.
“So, subject to any material volatility next year, I think we’re likely to see the same level of support continue, and I'd love to see transactions being marketed again in a far more public manner”, she concluded.
