Ex-Bankrupt Homeowners Entice on Spread Drop: Australia Credit

Sales of bonds backed by home loans to self-employed or previously bankrupt Australians have passed 2012’s total, after yield premiums fell to the lowest since the debt triggered the global financial crisis.

Offerings of so-called nonconforming mortgage bonds rose to A$1.05 billion ($1.08 billion) this year, 17 percent more than for the whole of 2012, data compiled by Bloomberg show. Pepper Home Loans Pty paid 120 basis points more than swaps on its biggest sale of the debt in five years, offering 40 basis points more than Commonwealth Bank of Australia did on notes backed by mortgages that met normal lending requirements.

Australia’s mortgage-bond market is recovering after being an “innocent casualty of brand damage” from the U.S. subprime collapse, Treasurer Wayne Swan said this month when he announced the closing of a A$20 billion aid program for the industry. Partly due to the nation’s unrivaled two-decade-long economic expansion, arrears of more than 90 days on nonconforming loans stand at 3.2 percent, compared with 16 percent in the U.K., Moody’s Investors Service data show.

“Recent deals have seen us getting involved,” said Anthony Kirkham, Australian head of investment management at Western Asset Management Co., which oversees $462 billion worldwide. “The margin is good and pools are sound.”

More than 35 percent of U.S. subprime borrowers are at least 60 days late with their loan payments, the Moody’s report published March 28 show. While U.S. banks let loan standards slip, Australian lenders kept them much stricter, according to Kirkham.

Biggest Deal

Pepper sold A$350 million of mortgage-backed bonds on April 12, its largest non-conforming sale since March 2007, data compiled by Bloomberg show. The lender, which specializes in loans for the self-employed and others who find it difficult to get mortgages from large banks, paid 65 basis points less than 11 months earlier to sell AAA rated debt, data compiled by Bloomberg show.

Of the 1,123 loans backing its offering, 42 percent were to self-employed homeowners and 39.4 percent of the pool comprised mortgages to credit-impaired borrowers, with 6.2 percent made to people with prior bankruptcies, according to a presale report from Fitch Ratings on April 10.

Liberty Financial Pty has raised A$700 million from two sales of nonconforming bonds this year, already the most mortgage-backed bonds of any collateral type it has offered since 2009, the Bloomberg-compiled data show.

Margin Driven

“Our mortgage-bond performance has been exemplary,” said Peter Riedel, chief financial officer at the Melbourne-based non-bank lender, adding that it has not been affected by rating downgrades or a need to draw on liquidity reserves. “We’re seeing new investors coming into our program and we’re seeing the reemergence of investors who’ve supported our programs over a long time. That might be driven by the difference in relative value between prime and non-conforming margins.”

Financial institutions pay an average 4.17 percent to sell debt in Australia, 16 basis points less than at the end of last month, according to Bank of America Merrill Lynch indexes. Benchmark 10-year government yields touched 3.10 percent in Sydney today, the lowest since November, after government data showed first-quarter inflation was slower than economists forecast.

Rate Cuts

The steepest interest-rate cuts in the developed world have bolstered demand for housing by reducing standard mortgage costs to 6.45 percent as of March 31 from 7.8 percent two years earlier. Home loan approvals rose 2 percent in February, beating estimates with the first increase in five months, according to data published by the statistics bureau this month.

Traders are pricing in a 52 percent chance the Reserve Bank of Australia will cut the 3 percent benchmark interest rate again next month to a record-low 2.75 percent. Australian consumer prices rose 0.4 percent in the three months ended March 31, compared with the median forecast of 0.7 percent in a Bloomberg News survey of 24 economists.

Commonwealth Bank reduced the cost of RMBS supported by prime home loans to 80 basis points more than swaps in February, the narrowest spread since 2007, data compiled by Bloomberg show. No other borrower has yet matched this premium on similar debt and premiums are unlikely to fall much more, according to David Goodman, head of global capital markets worldwide at Westpac Banking Corp.

Narrowest Spread

Spreads may narrow further on notes further down the capital structure on demand from more asset managers, he said.

“Where we’re seeing some juice is the AB and B tranches,” Goodman said. “The investor base has really expanded. They love the yield.”

Resimac Ltd., which first sold RMBS in 1988, last month shaved 75 basis points off its cost of mezzanine notes, compared to what it paid nine months earlier, data compiled by Bloomberg show. The lender’s latest A$44.6 million of AB notes, which are backed by prime mortgages and are neither first nor last in line to be paid, have a 210 basis-point spread, the data show.

The Sydney-based issuer also sold A$26.3 million of B1 notes, the second-most subordinated class, at 340 basis points, 85 basis points less than similar debt sold in June.

Government Program

The Australian government this month ended a A$20 billion investment program that has been running since 2008 to boost competition between home-loan providers. The market is now “healthy, competitive, securely operating,” Treasurer Wayne Swan said on April 10. The government did not buy securities backed by nonconforming loans.

Resimac last sold non-conforming debt in October when it raised A$300 million, data compiled by Bloomberg show. The lender is hoping to sell more of the bonds this year, probably in the third quarter, according to Mary Ploughman, an executive director of securitization at the lender.

“Investors really buy into the credit quality of this nonconforming paper,” said Sarah Samson, a director in the securitization team at National Australia Bank Ltd. “They get a good margin and it is pretty good credit quality. I think investors are starting to understand that more now.”