Regulatory uncertainty hangs over securitisation market recovery

The Australian Securitisation Forum's annual conference started on a positive note yesterday, with a panel of overseas portfolio managers talking about their growing enthusiasm for Australian residential mortgage-backed securities and other structured securities.

However, the regulatory cloud was hovering. In this case it was uncertainty about how securitised assets would be treated under European liquidity coverage ratio rules that are yet to be finalised.

One speaker suggested that only securitised assets originated in Europe would be counted as high quality liquid assets for LCR purposes. Another thought RMBS pools would have to be exclusively owner-occupier mortgages to qualify as HQLA.

All agreed that the treatment of securitisation within the European implementation of LCR (which is still under discussion) would have an impact on the willingness of financial investors to hold securitised assets.

With that caveat, the portfolio managers were bullish on Australian RMBS and other securitised assets.

The head of credit investment at the European Bank for Reconstruction, Neil Calder, said his fund had "re-engaged" with the Australian market over the past couple of years.

Calder has A$1 billion allocated to "Aussie product" - mostly RMBS and covered bonds. In recent times he has started investing in auto and equipment ABS.

Calder likes the credit quality of Australian asset pools, as well as the consistent underwriting and high quality research.

He said the market's Achilles heel was weak after-market liquidity.

The director of ABS portfolio management at Standard Chartered, Michael Rose, said his fund had been buying Australian RMBS for the past few years. He sees it as high quality paper that offers diversification and a higher yield.

Like Calder, Rose believes lack of liquidity is an issue. "You need more investors and different types of investors, and it would be good to see more dealers coming in to facilitate trades."

Rose said he was also keeping an eye on Australia's overheated housing market.

Praveen Joseph, an associate financial officer at the International Finance Corporation, which is part of the World Bank, said Australian assets made up 20 per cent of a $5 billion investment in structured products at the IFC.

He has been buying prime ADI, non-ADI and non-conforming RMBS from Australian issuers for the past four years. He said the non-conforming sector was "very exciting".