Australian RMBS market fundamentals are not too far off the mark when compared to the story in Europe, which could be making European investors more comfortable with buying these deals.
"Margins have come in quite a lot for Australian RMBS - margins over Libor have come in from to seven to 10 basis points from 15 to 18 basis points," said one market source. "And investor's appetite has grown to take larger pieces in some of these issues with many of them oversubscribing. These deals start off with 1 billion ($1.3 billion) but they can potentially grow larger, based on the support that they have been getting."
According to Standard & Poor's, which last week prepped for its second annual Australian RMBS seminar hosted in London, RMBS issuance by Australian originators has increased every year since 1998. 2004 was another record year, with total issuance just over A$58 billion ($45.9 billion). Of this, A$20 billion was denominated in Australian dollars, while the equivalent of A$38 billion was issued in foreign currencies, mostly in euros and U.S. dollars.
Analysts at S&P reported that investors appear more inclined to invest on the basis of their appetites for particular currencies (subject to being comfortable with the credit) rather than the geographic jurisdiction, the previous distinction between domestic and offshore issues has lost some relevance. "European's have historically taken a back seat compared to U.S. investment in this paper," said one market source. "But now we are seeing the medium size regional banks finding it easier to access the European markets, and European investors have increasingly become comfortable with participating on the domestic front."
Like the U.K. housing markets, Australia experienced a slowdown in overall lending activity in 2004. Home prices across the country have declined around 5%, with some regions softening as much as 10% and others reporting an appreciation, said one market source. But consumer confidence remains strong. This, mixed with the low unemployment, should maintain the current market fundamentals. "There will be some incidence of defaults but investors feel confident the market will continue to perform," said one market source. "Critical demand for Australian paper is coming from all markets - Europe is competing with U.S. and domestic investors."
"Our expectation is that over the next twelve months margins will continue to contract and issuers will continue to issue into this market," the source added. S&P calculated that there are over A$520 billion worth of outstanding home loans in Australia and only about 18% of them have been securitized.
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