The outlook for the Australian mortgage-backed securities market this year is positive, with a fresh surge of activity expected from the country's major banks and renewed interest in the domestic market as an opportunistic source of funding, despite its structural limitations compared with the European and U.S. markets.
The outlook for the asset-backed commercial paper sector is more mixed, with ratings agency Moody's Investors Service predicting further consolidation and marginal asset growth, and growing diversification by domestic programs into the offshore markets.
Big Four Look Abroad
Commonwealth Bank of Australia and ANZ Banking Group, two of the "big four" major banks, will make a difference, with CBA issuing in the global MBS market for the first time and ANZ making a long-awaited move to begin securitizing part of its home loans book. The total value of the big four mortgage portfolios is around A$130 billion (US$85 billion).
Neither bank has disclosed much detail about its plans, although CBA has confirmed appointing J.P. Morgan to lead its deal. The bank, by far the country's biggest mortgage lender, will be the third Australian to issue global MBS, after Westpac Banking Corp. and St. George.
Westpac, which has conducted two such deals so far through its Westpac Securitisation Trust, plans a third during the first half of this year. Together, the CBA and WST deals, expected to be worth about A$1 billion each, will take to around A$7 billion the value of Australian mortgages securitized in the global market.
CBA's strategy differs from those of other Australian securitizers which have issued offshore, in that the bank is making its first such issue in the predominantly US-based global market. Its predecessors have all made their international debuts in Europe.
The bank's move appears to reflect growing capacity constraints for Australian MBS in the Euromarkets, which was underlined last year when Bank of Western Australia was forced to cancel a US$250 million European deal because of adverse market conditions and lack of investor interest.
ANZ's plans, when made public, will also be interesting. Although the bank's investment banking division has managed trade receivable securitizations for a range of clients in both the domestic commercial paper and term markets, and in the US CP market, it has yet to issue MBS or ABS into any market on its own account.
Given that it is now received wisdom that major Australian bank and non-bank securitizers issue offshore to achieve volume, with pricing a relatively minor consideration, the market will be watching to see whether ANZ issues domestically first or heads straight for the offshore sector.
In the domestic market, conditions have improved relative to last year's second half, when Y2K-related fears caused spreads to move out across the curve.
Puma Kicks Off 2000
PUMA Finance, the market's biggest non-bank securitizer, which is managed by Macquarie Bank subsidiary, Macquarie Securitisation, brought the year's first deal with a A$148 million refinancing of mortgages from an A$800 million pool securitized by the PUMA P-5 Master Fund in 1996. The original deal had been subject to a step-up and call option, which Macquarie had exercised.
While most of the redemptions were to be paid out of mortgage prepayments that had been held in escrow on behalf of investors, the floating rate note was necessary to finance a slight - and not unexpected - shortfall in the available balance. The deal priced at 20 basis points over the bank bill swap rate, between three and five basis points better than expectations.
Shortly afterwards, Australian Mortgage Securitisation, which is owned by ABN Amro, became the first primary issuer of the year with a A$300 million deal, considered large by local standards.
This had still to price as ASRI went to press, but the size of the transaction was taken as a good omen for the market's short-term performance.
Other domestic deals likely to take place this year include another auto loan securitization by St. George, which made its first, A$570 million, such deal last year; and the first securitisation by St. George of its Portfolio home equity product.
Moody's Note Growth
Moody's, in its review of the market, noted a 66% increase in Australian structured finance transactions last year, from A$10 billion in 1998 to A$17.2 billion. As in previous years, MBS dominated, accounting for 82% or A$14.2 billion (1998: A$9 billion), while asset-backed securities were "important contributors" to market growth "for the first time since 1995," accounting for 16% or A$2.6 billion (A$1.2 billion).
The sharp increase in MBS during 1999 reflected the return to market of non-bank issuers, many of which had warehoused assets during the global market uncertainties of 1998.
Cross border MBS issuance rose by 87%, from US$3.1 billion in 1998 to US$5.8 billions. "Cross border issuance now represents approximately 63% of total MBS issuance, up from 55% in 1998," said Moody's. "Due to the potential MBS supply held by the major lenders, the trend toward larger issuance size, and the current lack of depth in the Australian market, Moody's anticipates that the major Australian MBS issuers will continue their cross-border focus as a way to diversify their funding base in year 2000."