Photographer: Brendon Thorne/Bloomberg

Aussie Mortgage Bonds Sell at Slowest Pace in Four Years

  • RMBS issuance Down Under 36% less than at same stage last year
  • Decline comes as fundraising in unsecured market has increased

Home-loan providers in Australia are selling mortgage bonds at the slowest pace in four years, flocking instead to cheaper debt that doesn’t require collateral.

Just A$14.8 billion ($11 billion) of new residential mortgage-backed securities have been issued so far in 2016 by banks and other housing lenders, 36 percent less than at this stage last year, data compiled by Bloomberg show. At the same time, unsecuritized borrowing by Australia’s four biggest banks is running at the fastest pace since 2009.

“Because the spreads have been so wide in RMBS relative to senior unsecured, it’s expensive,’’ said Tally Dewan, a securitization strategist at Commonwealth Bank of Australia in Sydney. “They’ve done so much of senior unsecured and subordinated issuance, maybe they haven’t needed as much RMBS.’’

The drop follows moves by the banking regulator to mitigate potential financial stability risks posed by the Reserve Bank of Australia’s decision to slash borrowing costs to a record low, with lenders being urged to tighten standards and boost capital. That’s helped to slow private-credit growth to just 5.4 percent year-on-year, the most muted since 2014.

Mortgage-backed bond issuance by the country’s four biggest banks has halved to A$3.58 billion from A$7.85 billion last year. While Australia & New Zealand Banking Group Ltd. on Monday launched its first RMBS offering in more than a decade, the market’s seen just one deal apiece from CBA and National Australia Bank Ltd. this year, and none from Westpac Banking Corp. since May 2015. Issuance by other banks, building societies and credit unions has also declined to just A$4.12 billion from A$10.4 billion.

Changing Landscape

Mortgage lenders, bond investors and sale managers gathering for the Australian securitization industry’s annual conference on Monday in Sydney will be keenly aware of the decline as they meet to discuss the future of the market.

The Australian Prudential Regulation Authority this month released its revised standard for securitization, a set of rules known as APS 120 that has been discussed for several years and is due to be implemented in 2018. The new standard -- which includes changes to rules around date-based calls, revolving facilities and warehouse arrangements -- could ultimately facilitate more offshore sales, credit card securitizations and replenishable asset pools known as master trusts.

Conference participants will also be cognizant of risks within the Australian housing market, where prices have been driven higher by record low central bank interest rates, and the challenges posed by the economy’s transition away from mining investment. Moody’s Investors Service said in a report Monday that it expected RMBS delinquencies to rise moderately amid “weaker economic conditions in states reliant on the mining industry, rising underemployment, weak wage growth, and less favorable housing market conditions.”

One bright spot for the RMBS market this year has been fundraising by institutions that don’t take deposits from savers such as Resimac Ltd. and Pepper Group Ltd. They have fewer funding options than banks and the imposition of stricter lending standards by their competitors may also be bolstering their customer base. Issuance from that segment of the market has climbed 40 percent to A$7.12 billion, although that hasn’t been enough to offset reduced volumes elsewhere.

Choosing Alternatives

“The non-banks obviously have to continue to fund through the securitization market, so they’ve got no choice but to continue to issue,’’ said Sonia Goumenis, a partner who works on securitization deals at legal firm Clayton Utz in Sydney. “From a bank’s perspective, unless there’s credit growth and they need to fund using securitization, then they can access alternative sources including deposits.’’

The four biggest banks, which had a combined 78 percent share of the nation’s A$1.5 trillion mortgage market as of Sept. 30, get about two-thirds of their funding from deposits and the rest from debt markets, according to regulatory data. The annual pace of deposit growth across the system fell to 6.1 percent in September from 6.5 percent a year earlier, according to APRA data.

Costs Compared

As an indication of how wholesale funding markets have compared this year, CBA in March priced a tranche of RMBS with a 3 1/2-year weighted average life at a spread of 140 basis points over the bank bill swap rate, while an offering of 3 1/4-year unsecured notes was sold the next month at a gap of just 98 basis points.

Likewise, Bendigo & Adelaide Bank Ltd. this month sold similar tenor senior unsecured notes at a spread of 110 basis points, while RMBS notes with a 3 1/5-year weighted average life were brought to market by the lender in August at a 133 basis point spread.

“We’ve seen a tightening of spreads in recent months, and I believe the spread widening that we previously saw in RMBS compared with senior unsecured debt will significantly reduce next year,” said CBA’s Dewan. “We’re seeing demand including from Asian markets for RMBS paper, and that should tighten spreads further.”

    Before it's here, it's on the Bloomberg Terminal.