Local real money investors sit out the securitisation recovery

Despite the strong recovery in the Australian securitisation market over the past couple of years, the sector will not achieve long-term sustainability until domestic real money investors get more involved, according to Reserve Bank analysis of the market.

The head of the RBA's domestic markets department, Chris Aylmer, told delegates at the Australian Securitisation Forum annual conference yesterday that holdings by real money (non-bank) domestic investors were a quarter of their level four years ago.

"The longer term sustainability of the Australia securitisation market may well depend on increasing participation in the market by domestic real money investors," Aylmer said.

Australian institutions have issued A$26.5 billion of residential mortgage-backed and other asset-backed securities so far this year, which is almost at last year's level and well above levels of a few years ago. The peak of RMBS issuance was $42 billion in 2007.

Aylmer said the stock of RMBS held by non-resident investors has been steady since late 2010, suggesting they are net buyers of Australian securitised assets.

"The strong performance of Australian RMBS and lack of issuance elsewhere may have been an important driver behind the participation of foreign investors," he said.

There has been a pickup in RMBS holdings by authorised deposit-taking institutions, which now hold just under 40 per cent of outstanding securitised assets, with the major banks accounting for much of the increase.

The reason for this is that RMBS and other asset-backed securities can be used as collateral with the Reserve Bank in its open market operations and liquidity facilities. The value of RMBS held by the RBA under repurchase agreements increased from $1 billion in June last year to $25 billion a year later.

"Our current holdings are a function of our liquidity operations, in particular the expansion of the facilities we offered as part of the move to same day settlement of direct entry payments in November 2013. This resulted in a larger volume of repos being entered into by the RBA on a regular basis," Aylmer said.

The chairman of the Australian Securities and Investments Commission, Greg Medcraft, who is also the chairman of the International Organisation of Securities Commissions, said IOSCO and the Basel Committee would publish a paper next month looking at what needs to be done to get more non-bank investors into the asset-backed securities market.

Medcraft, who also believes the securitisation market needs the support of real money investors to be sustainable, said IOSCO surveyed market participants during the preparation of the paper.

It found there were three things deterring investors: a negative perception of securitisation lingering from the financial crisis; a perceived lack of regulatory certainty; and difficulty assessing the risks involved in securitisation structures.

"Investors are looking for simplicity and comparability," Medcraft said.

Perpetual Corporate Trust general manager Richard McCarthy said the Reserve Bank's move to require standardised reporting would help overcome these impediments.

The RBA has created standard reporting templates that issuers of RMBS will need to compete and make publicly available as a condition of their securities being eligible for repurchase agreements with the RBA. The new rules take effect at the start of next year.

"Going forward there will be consistency and standardisation, with loan level data available on a month to month basis," McCarthy said.

Senior fixed income investment managers speaking at the conference were all at pains to point out that it is generally easier for them to invest in unsecured senior bonds, and possibly take on a few AAA rated mortgage-backed bonds from major or second tier banks than to work their way through multi-tranche securitisation structures.

More specifically, the local real money investors' views on the introduction of master trust structures for asset backed securitisations - a long held project among industry players - was underwhelming.

As Tim Van Klaveren, executive director and head of credit at UBS Global Asset Management said: "It's not a game changer, especially if hard bullet maturities are not allowed, as we'd still need to estimate cash flows."

Andrew Whittaker, a credit analyst at Queensland Investment Corporation was less forthright, and agreed that if rules on master trusts were accepted by APRA in a format that was close to what the industry wanted, having fixed rate issuance in a number of currencies would be an advantage - if indeed it did become a large part of a larger fixed income index so that insto investors could compare relative performances.