Australia a Mecca for Yield Starved in Europe: Mortgages

Investors seeking mortgage bonds outside recession-plagued Europe are heading to Australia, the world’s fastest-growing major developed economy, boosting issuance to the highest in almost two years.

House prices are rising in the South Pacific nation, where the benchmark cash lending rate is more than five times higher than in the euro zone, and prime residential mortgage-backed securities have never defaulted. Delta Lloyd Asset Management NV is among European investors buying the bonds, said Hon-Cheung Man, a fixed income portfolio manager at the company, which oversees 51 billion euros ($67 billion) of assets.

“We did it for diversification from Europe basically,” he said in a telephone interview from Amsterdam. “I don’t think a lot of people actually focus on Australian RMBS yet.”

Commonwealth Bank of Australia led A$8.2 billion ($8.3 billion) of mortgage bond offerings last quarter, the most since the three months ending June 2011, data compiled by Bloomberg show. The market’s revival also is helping smaller lenders fund riskier mortgages, with more securities backed by loans to self-employed or previously bankrupt borrowers sold so far this year than in all of 2012.

In Europe, Barclays Plc forecasts a 50 percent decline in offerings this year, as mortgage lending slumps from Spain to Italy and where the Bank of England has choked off U.K. home-loan securities by funding the country’s lenders at cheaper rates than they could access in the bond market. That’s forcing investment managers to seek out new places to put their cash.

Meeting Investors

Suncorp-Metway Ltd. met European investors at the end of April, a person familiar with the matter said at the time. The Brisbane, Queensland-based lender sold A$1.15 billion of securities today, boosting its offering from A$750 million and allocating notes to investors in the U.K., Hong Kong, Japan and New Zealand as well as Australia, according to Simon Lewis, the issuer’s head of funding. Some 35 percent of orders came from offshore, he said.

“The vast majority of those accounts are new to Suncorp” or hadn’t invested in the bank’s securities for some time, Lewis said by telephone today. “They’re returning to the sector.”

Renewed investor confidence prompted Treasurer Wayne Swan to end sovereign purchases of mortgage bonds, he said April 10. The government bought A$15.5 billion of the securities since 2008 to bolster competition in the mortgage market, and says it has funded the equivalent of 245,000 home loans.

‘Positive Sign’

“The return of foreign investors is a very positive sign of recovery and I think that also highlights the appeal of Australian RMBS,” said Rob Nicholl, chief executive of the Australian Office of Financial Management, the agency that oversaw the sovereign’s investments. “Australian RMBS, if you look at it across the capital structure, seems to be offering good value relative to other products,” he said, speaking after the Treasurer’s announcement.

The program’s end contrasts with the U.K., where the Bank of England’s Funding for Lending Scheme that helps companies and consumers get cheaper loans was last month extended until January 2015. The program has undermined mortgage-bond sales even as investors are set to receive more than 8.4 billion pounds ($13 billion) of principal repayments on existing notes by year-end, Barclays analysts led by Dipesh Mehta wrote in a March report.

Sales Hiatus

The London-based bank last month cut its forecast for prime offerings in Europe’s biggest market for the securities to the equivalent of 5 billion euros in 2013, from a previous prediction of 12.5 billion euros. U.K. lenders have sold no RMBS this year, data compiled by Bloomberg show.

While the U.K. economy expanded just 0.2 percent last year, growth of 3.6 percent in Australia was the fastest pace among 35 advanced markets tracked by the International Monetary Fund. The South Pacific nation will grow 3 percent in 2013, the most among major developed economies, the IMF forecasts show.

House prices in the nation rose 2.6 percent last quarter from the same period a year earlier, according to a government report published May 7.

Home-loan payments more than 90 days late fell to 0.55 percent in the fourth quarter, the lowest rate since December 2010, on economic growth, low unemployment and interest-rate cuts, Fitch Ratings said last month.

Australian home owners are benefiting from the steepest round of benchmark rate reductions in the developed world, which lowered standard mortgage costs to 6.45 percent in April from 7.8 percent two years earlier, according to central bank data.

Mortgage Savings

The central bank trimmed rates to a record-low 2.75 percent on May 7, prompting Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank Ltd. to reduce their variable mortgage rates by 25 basis points. The reduction saves customers A$62.50 a month in interest payments on the average A$300,000 home loan, NAB said in a statement at the time. Australia & New Zealand Banking Group Ltd. lowered loan costs by 27 basis points, it said today.

While the rate reductions are bolstering the nation’s property market, they’re also curbing gains in its currency. The Australian dollar, known as the Aussie, has dropped about 4 percent over the past month and Stanley Druckenmiller, who made $1 billion for George Soros as his chief strategist by forcing a devaluation of the British pound in 1992, said this week that investors should bet against the Australian dollar.

Still, the Aussie has gained 43 percent against the U.S. dollar, 60 percent against the yen and 54 percent against the euro since the end of 2008, handing windfall profits to foreign investors.

Yield Premiums

While Australian lenders have cut RMBS costs to the least since the financial crisis, yield premiums have fallen less than those on other financial debt. Commonwealth Bank paid an 88 basis-point spread on home-loan debt in February, 52 basis points less than it paid on similar bonds in August, data compiled by Bloomberg show. Spreads on Australian dollar-denominated debt sold by financial institutions narrowed 69 basis points during the same period, according to Bank of America Merrill Lynch indexes.

Non-domestic buyers purchased almost three-quarters of Australian RMBS in 2007, before investments fell to zero for the next three years, according to Standard & Poor’s, which looked at public deals it rated.

Foreign demand is “a two-edged sword,” said David Goodman, head of global capital markets worldwide at Westpac. “We saw what happened in 2007 when we had half the market held offshore. Those offshore were forced sellers.”

Less Leverage

Investors are using less leverage this time around and have a better understanding of RMBS collateral and structures, he said.

Pepper Home Loans Pty and Liberty Financial Pty have sold A$1.05 billion of securities backed by non-prime loans this year, data compiled by Bloomberg show.

Resimac Ltd.,a Sydney-based non-bank lender, raised about A$750 million from its largest sale of mortgage-backed bonds in more than five years in March, data compiled by Bloomberg show. The offering included $300 million of securities denominated in greenbacks.

The borrower is now planning a sale of bonds backed by non-conforming loans, probably in the third quarter, and may also look to do another prime transaction this year, according to Mary Ploughman, executive director of securitization.

Australian RMBS is “a great option because of the quality of the collateral and the structures and I think generally investors get very comfortable with that,” Ploughman said. The return of foreign investors is a key reason for the RMBS recovery, she said.

Offshore buyers have “driven the rally we’ve seen over the last quarter or two,” Westpac’s Goodman said. “They’re definitely going to continue driving it.”