Analysts at Bank of America Merrill Lynch see value in Australian RMBS for global investors, despite the recent downgrades of junior notes by Moody’s Investors Service.
As banks from the country approach their 8% asset limit for covered bonds, RMBS issuance should pick up, the analysts said in their weekly report.
In their view, while Australia’s senior triple-A-rated tranches offer yield pick over comparables in the U.K. RMBS sector, it is the junior triple-A pieces that provide the biggest opportunities for returns. This holds especially true for investors who are less ratings sensitive.
The junior triple-A deals have a strong link to providers of lenders mortgage insurance (LMI), some of whom saw their ratings recently downgraded by Moody’s.
For instance, the agency cut Genworth Financial Mortgage Insurance to ‘A3’ from ‘A1’ and QBE Lenders’ Mortgage Insurance to ‘A2’ from ‘Aa3.’ In addition, Moody’s has cut a number of junior and mezzanine tranches in Australian RMBS.
But BofA Merrill analysts believe that the downgrades were already priced into deals.