Post-Libor uncertainty weights on fixed income markets

The discontinuation of BBSW was a topic of major concern on day two of the Australian Securitisation Forum conference, underlined by the release of an ASF report based on a membership survey, and the marketing of a new RMBS deal by CBA.

The ASF's interest rate benchmark survey report highlighted the need for "robust fallback arrangements" when major international benchmark rates are discontinued partway through the life of a security.

The Australian Securitisation Forum, as the peak industry body representing participants in the securitisation market, conducted the survey over October. The aim was to gather specific feedback from the ASF members and the wider participants in the Australian securitisation market on potential interest rate benchmark reforms, both locally and globally.

The ASF took as its starting point one where change in AUD issuance was inevitable but not urgent.

"Australia does not face the immediate time pressures other markets face with the phase out of IBOR reference rates for floating rate debt and derivative exposures. The ASX, as administrator of BBSW, has taken steps to improve the robustness and longevity of BBSW as the domestic floating rate benchmark rate," Chris Dalton, chief executive of the Australian Securitisation Forum, wrote in the report.

This view was strongly reflected in the responses from ASF membership, with 82 per cent supporting the continuation of the 1-month BBSW benchmark for the next 12 months. Beyond that, the outlook became decidedly hazy.

Nevertheless, as delegates to the ASF conference were told in several discussion panels and presentations, regulators and market participants are scrambling around the globe to come up with arrangements that will allow standardisation of benchmarks across a range of financial products and services.

The Sydney ISDA conference in October 2019 looked at the impending changes to IBOR benchmarks. Christopher Kent, RBA assistant governor, highlighted the need to address benchmark changes with particular reference to LIBOR.

This is a particular item of concern for global investors, as Bob Behal, principal at Vanguard's fixed income group, made clear. He said that in the US the industry was working to establish transition protocols to minimise the risk of a legacy issue - that is a coupon based on benchmark that has no place.

"ABS issuers are starting to standardise [in the US]," he said. "We still need to manage the stability of the benchmarks themselves as [this could] change the risk profile of securities.

"One way to manage by bore risk is to issue fixed rate securities through 2021 to avoid any volatility that hasn't been priced in," he said.

The complexity of the task was emphasised by Behal's fellow panellist, Pieter Bierkens, the CBA's interest rate benchmark reform lead. "Much as we'd like to have standardisation, the fullbacks are different for various asset classes," he said.

Bierkens said that one of the proposed replacement rates, one month AONIA - or the compounded RBA interbank overnight cash rate, to give its full title - has been referred to as a risk free rate as it is based on overnight interbank rates, "so [it's] the shortage of the tenor makes these almost risk-free."

The panel also examined the CBA's first-to-market residential mortgage-backed securitisation deal, priced according to AONIA-based calculations, launched this week after what its proponents said was months of preparation.

This was a A$1 billion seven tranche transaction to gain first-to-market bragging rights and genuinely test the market.

The top two rated class a Notes, of A$920 million and $38 million, respectively, were given preliminary ratings of AAA by both Standard and Poor's and Fitch Ratings just prior to the start of the conference. The collateral pool consists of prime Australian owner-occupier mortgages, with

The deal, as it relates to changing benchmark, has been well summarised in Fitch's presale report:

"Medallion 2019-1 is the first Australian RMBS transaction with floating-rate notes that reference the compounded AONIA (compounded RBA interbank overnight cash rate). The specified rate is a backward looking calculation that calculates the rate of return of a daily compounded investment over the monthly observation period. The fixed rate swap and basis swap also reference the compounded AONIA rate in place of BBSW."

Fitch said it assumed the "interest-rate risk arising from standard variable-rate assets and AONIA-linked liabilities is equivalent to the basis risk between standard variable-rate assets and BBSW rate-linked liabilities".

Ed Freilikh, executive manager of term funding at CBA, fielded plenty of questions on this deal, to be known as the Medallion Trust Series 2019-1.

He told the ASF delegates that CBA chose one month AI near benchmark as the best basis for alignment with the underlying mortgage cash flows in RMBS issuance.

He also was quizzed on who bought into the deal but sidestepped the question, noting that normally 50 per cent of his investor base is overseas and this time they wanted as broad an investor mix as possible.

As far as pricing went, "the concession we paid for this deal is consistent with that for any new type of transaction," he said.

Banking Day understands this premium could be as high as 20 basis points.

Not all investors are fans of the medallion deal.  Rob Camilleri from specialist investment house Realm, said the pricing reflects the differential between cash and bills, but does not reflect the risk of the deal being orphaned, especially if ongoing issuance is not seen.  He was one domestic investor that bid for the notes, but was sceptical of the implication that many local investors participated.

"[CBA's Ed Freilikh] said in a roundabout way that there had been a lot of interest from international investors, and that is to be expected," Camilleri said. "What he didn't inform [us] was how many Australian investors supported the deal."

Pricing for the Medallion Trust Series 2019-1 will shed light on where the securitisation market should be heading.