Aussie RMBS conquers the world

In May 2007, the Australian mortgage bond market was booming. The impending credit crisis appeared to create opportunities for Australian borrowers, as our mortgage market appeared healthy. Multi-billion dollar issues were being printed with ease as offshore funds continued to buy our residential mortgage backed securities. Today Australian mortgage bonds remain the safest on the planet, but the global mortgage backed markets have long since ceased to function.

***Aussie RMBS conquers the world (29 May 2007) ***

As the securitisation world descends upon Barcelona for the industry's annual gathering, those representing Australia's RMBS sector will be holding their heads high.

A bumper A$7 billion issue from Westpac, and sizeable offers from Member's Equity, BankWest and Suncorp has seen almost A$20 billion of Australian RMBS issued in the quarter already. At least another A$3 billion is on its way in the coming weeks. Australian RMBS is being snapped up no matter how much is being pumped out.

Of Q2 issuance only 29.8 per cent of Australian RMBS has been denominated in Australian dollars. US dollars have accounted for 37.6 per cent of issuance with Euro issuance accounting for 21 per cent. Offshore demand for Australian RMBS is being driven for the most part by a flight to quality.

The Australian mortgage backed market is the world's fourth largest by issuance, behind the USA, UK and Spain, but is the only one that is trouble-free.

"The Australian collateral is seen not to have headline risk; The residential property market has experienced a soft landing in Australia. Arrears have jumped a little but nowhere near as much as the US sup prime and European markets in general. Australian RMBS collateral is finding a home in global ABS investor portfolios without material price widening," says John Claudianos, director -securitisation, Deutsche Bank.

The US housing market is softer and still suffering the effects of a meltdown of the sup-prime lending sector. In the UK, the non-conforming sector is showing signs of stress through increased arrears and fraud. And in Spain, housing construction stocks have plunged amidst mutterings of a bursting property bubble.

"Aussie RMBS is performing well as our housing market moves through the correction phase, while offshore markets are still in a down-swing. The established house market is performing well and housing finance has rebounded after the rate rises of 2006," said David Goodman, analyst, Westpac Institutional Bank.

The uncertainty in offshore housing markets has made Australia a safe haven for investors. In the US, prime RMBS is issued from the federal housing agencies. Non-prime home equity issuance has however has fallen by 35 per cent this year. The lack of supply has left a pool of new funds seeking a home; with Aussie paper filling some of the void.

European investors too, remain hungry for Aussie mortgage bonds.

"Those that have been buying are buying more with some of the orders coming out of Europe two or three times larger than they were 18 months ago, its very encouraging," says Anthony Bell, director - debt syndicate, Societe Generale.

Ben McCarthy, managing director of Fitch Ratings Australia has just returned from Europe where he has been discussing Australian housing sector with market participants.

"Because issuance has been so regular, investors have spent the time to get comfortable with the sector. Also with full employment and property prices performing well, they are comfortable with whole Australian story," said McCarthy.

Many investors in Aussie RMBS are however far removed from the forces that shape our housing sector.

"Overall there is a thirst for information. One thing I noticed is that investors there are very 'headline' driven-for instance we had questions regarding the impact of the drought in the Murray-Darling Basin on Australian RMBS, "he added.

As demand strengthens and issuance spreads remain tight, conditions are good for lenders that access global capital markets.

Large bank issuers are also seeing their securitisation programmes in a different light. Capital management had been a key driver to securitise assets as banks sought to demonstrate the liquidity of their balance sheets to agencies and regulators.

But with pricing levels appearing to be more attractive, securitisation may begin to rival senior debt issuance from a cost of funding standpoint.

Securitisation is an intensive and complex method of funding for the banks but the benefits are growing while the costs are falling.

"There is a fundamental shift in bank's use of securitisation," says Doug Banks, director- global securitised markets, Citi.

"The major banks are likely to be increasing securitisers of RMBS pools with their primary focus changing away from a capital driver to a straight out funding cost driver. Its quite likely that the AAA RMBS pricing levels over time will rival their domestic debt programmes," said Claudianos.