Securitisation challenges
Members Equity Bank and Challenger Mortgage Management finalised mortgage-backed bond transactions last week that highlight the continuing difficulty of generating ongoing investor demand for this class of debt security.Investors have been buying tranches of these issues with a weighted average life of less than one year but have shown little interest in taking on any longer dated exposures. Investment in the bulk of RMBS issues has otherwise been left to the Australian Office of Financial Management.The Australian government has tried to boost the sector by allowing the AOFM to invest up to $8.0 billion buying new RMBS issues, but this allocation is likely to be exhausted around the middle of this year. So what happens after AOFM runs out of funds remains to be seen.The Australian Securitisation Forum, an industry lobby, announced last week that it had appointed Chris Dalton as its new CEO. Chris was previously country head and managing director of Standard & Poor's in Australia and New Zealand.As the sector's chief lobbyist Dalton will have the challenging task of persuading investors of the revitalisation prospects for the sector.This is unlikely to change as long as there remains an overhang of mortgage-backed securities in the secondary market.One option would be for the Australian government to simply guarantee senior RMBS tranches under AOFM's guidance. These tranches would thus be differentiated from the secondary market overhang and should be just as attractive to investors as any other government-guaranteed securities. But whether the government wants to add to its rapidly increasing contingent liabilities is another matter. Also, the mortgage originators would then be faced with the cost of the guarantee.Meanwhile, we reported a few weeks back that Macquarie Bank was working on an auto receivables-backed ABS issue. This has not yet eventuated but will be the first ABS issue for the year, if it does. In the meantime, the US government is trying to get its ABS sector firing again through its Term Asset-backed Securities Loan Facility, or TALF). (Just as the Australian government is trying to maintain competition among mortgage lenders, the US government is keen to maintain affordable finance to consumers to keep them spending.) Standard & Poor's reports that US$17 billion of investor purchases of ABS have been financed via TALF to date, at sales held in March, April and May. In the context of the US market, this doesn't seem a particularly large volume of securities. The very generous (to investors) Public-Private Investment Program, announced towards the end of March, was also intended, in part, to help in this area but has yet to get up and running.