Positive momentum in the Australian structured finance market
The structured finance market has seen positive momentum over 2023 with significant levels of primary market activity and a robust secondary market buoyed by increasing global participation.
The primary issuance market for structured finance has maintained a regular cadence over 2023 despite a series of headwinds that may have otherwise subdued supply. As at the end of Q3, year-to-date public issuance ticked over A$36 billion (US$22.7 billion) across 56 individual transactions. This is more than last year and just shy of the 2021 equivalent total – a year that turned out to be the busiest since the financial crisis.
“A shift in operating conditions for the nonbank sector over 2022 as a result of rapidly widening spreads, declining property prices and intensifying competition in the mortgage market were factors at play coming into the new year,” says Martin Jacques, head of securitisation and covered-bond strategy at Westpac in Sydney.
This starting point, coupled with global headwinds in the form of the failure of Silicon Valley Bank and the Credit Suisse-UBS forced merger in late March, might have shifted sentiment. “But the Australian securitisation market was very quick to look through these exogenous shocks and get back to business. More broadly, stability in house prices, surprisingly resilient asset performance in light of 400 basis points of interest rate increases and the false dawn of the ‘fixed rate cliff’ have seen significant volume placed with spreads grinding tighter,” Jacques says.
Westpac’s Melbourne-based structured finance director, Brad Schwarz, highlights the level of engagement from global investors. “We have seen increasing participation from offshore investors in primary bookbuilds, reflecting sound asset performance and attractive relative value,” he comments.
In contrast to a difficult 2022 in credit markets, 2023 has been a sharp improvement in sentiment, says Hugh Norton, executive director, credit trading at Westpac in Sydney. “Securitisation spreads have seen a profound reversal in 2023 – it has been almost a 180-degree turn on sentiment from last year,” he comments.
Residential mortgage-backed securities (RMBS) spreads widened during 2022 but have been contracting since June 2023. For instance, margins on bank prime issuance gapped wider from 60 basis points over BBSW in mid-2021 to 140 basis points last year. They have started tightening again and are now sitting around 110-115 basis points for senior tranches of second-tier back paper.
It is a similar story in the nonconforming market, where spreads are moving in to around 150 basis points over BBSW from the high-water mark of 175 basis points seen for much of the preceding 12 months, Norton says.
Tim Stalker, director, credit relative value at Westpac in Sydney, runs a credit investment portfolio that holds first and second priority bonds. He comments: “The last two years have been a volatile period for investing. However, underlying borrowers are adapting to the higher interest rate environment and cost-of-living pressures. As an investor in the senior parts of the capital structure, we remain comfortable with the underlying asset quality and the structural features of transactions, although we see potential for further modest increases in arrears as employment softens from the current strong level.”
Norton adds: “The depth of liquidity has been surprisingly pleasing. Despite the level of supply, it has been slightly harder for investors to access bonds in primary for certain segments – such as bank RMBS. This can feed into secondary demand, which is what we have seen.” Typically, Norton adds, liquidity is better when the market is rallying because investors are going into new primary deals and are happy to trade out of holdings in the secondary market if they have made a profit.
James Kanaris, Sydney-based head of structured finance at Westpac, notes that, over recent years, Westpac has further invested in its structured finance business – notably including growing in funding, credit sales, primary investment, secondary market and asset-backed research capabilities.
“This puts us in a leading position to assist our customers through the opportunities and challenges that lie ahead for the structured finance market,” he comments. “We aim to offer our customers a seamless path to capital markets, starting with the provision of warehouse funding all the way through to providing support facilities and services for public market issuance.”
From a trading perspective, Norton views regular market communication as key to assisting liquidity. The trading teams sends out daily runs via Bloomberg with indicative pricing for a range of securities and Westpac’s inventory, and emails monthly commentary of secondary-market conditions and turnover statistics. Meanwhile, the strategy team distributes regulatory securitisation research via Westpac IQ.
Overall, continuity is key – and Westpac remains active in the secondary market. “We will always try to provide secondary liquidity for our clients through all market conditions, not just when it suits,” Norton says.
This article first published in the Australian Securitisation Journal - November 2023
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