Turning to the securitisation market, Members Equity Bank became the first to undertake a mortgage securitisation this year. The bank internally securitised $114 million of its own mortgages to be held on balance sheet. This is also the first internal securitisation undertaken by MEB.
Leaving this aside - and it doesn't really count anyway - there has not been any issuance in the structured finance sector as yet for 2009. But perhaps looking at how the sector fared last year might provide some clues on what can be expected this year.
Excluding internal securitisations for repo transactions with the RBA, issuance last year totalled only $14.4 billion, including some private placements. The 2007 total was $54.8 billion.
The sub-sector that stood out last year was auto-backed ABS, which held up very well over the period with year-on-year volumes being virtually unchanged at $4.7 billion (down only $0.1 billion on 2007). This is largely a domestic market with little international investor participation.
So when the SIVs were offloading assets as fast as possible in the first half of the year and the secondary market was being flooded with Australian RMBS, this was not happening with Australian ABS. This would have given investors confidence that there would not be an over supply of ABS in the market, and with ABS being seen as far removed from mortgages and subprime concerns, investors were happy to continue to invest, albeit with margins doubling over the year.
ABS issuance was relatively steady throughout the year but that may not be the case this year as a lot of the issuance seen was the result of clearing out warehouses.
Demand for RMBS all but evaporated in the first few months of the year, as increasing concerns about the fall-out from the subprime crisis in the United States brought international demand for Australian RMBS to a halt and saw the secondary market flooded with product being dumped by international investors. The third quarter saw some confidence return to investors with almost $5.3 billion of RMBS issued, as these pressures started to ease, but the onset of the GFC from October brought this to a halt.
The fourth quarter finished with $3.3 billion of issuance as a result of AOFM entering the market as a cornerstone investor for the deals that were bought in November and December. AOFM supported RMBS issues totalling $2.6 billion.
AOFM is expected to be the cornerstone investor in more RMBS issues this year, starting from this month.
There was some non-AOFM backed issuance in October and UniCredit completed the year with a $13 million, prime low-doc, RMBS issue via Trilogy 2008-1LD Trust. The notes were taken up by a single investor, with the Class A tranche priced at 170 bps over bank bills and the Class B tranche at 350 bps over. UniCredit hopes to follow this up with an AOFM backed deal.
By our count, internal securitisations for repo transactions with the RBA came to just under $150 billion last year. This is a massive amount of potential liquidity that has been created by banks and other ADIs in unprecedented circumstances. While it is likely that much of this will never be needed, it is impossible to say how much has been 'repoed', as the Reserve Bank no longer separates this data.
The big question now is whether any of this paper will find its way into investors' hands? In other words, is there an incentive for banks to sell this RMBS outright, rather than just holding it on balance sheet for possible repo transactions?
When three-year funding for the major banks was attracting 90 to100 bps plus a 70 bps guarantee fee at year end, and the price for Class A RMBS issuance with a three-year weighted average life was around 120 to 140 bps, the outright sale of repo-eligible RMBS to investors may have been attractive, ignoring volume constraints. With the recent credit spread contraction on bond issuance by banks the economics of any deal will depend on where RMBS is next seen to be priced, but as credit spreads contract issuance volumes should increase.
RMBS issuance may have a more significant place in the funding mix of banks going into 2009. But on the other hand, perhaps the banks would prefer not to see any life breathed into this market.
20090216 rmbs