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Thursday, 18 July 2019

Life down under

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At least in Australia, the structured finance market is functioning normally. Hopes of a comeback elsewhere, however, look far-fetched.

Australian players wait for an umpire’s decision during an international rugby union test match.

Source: Reuters/Daniel Munoz

Australian players wait for an umpire’s decision during an international rugby union test match.

Australia may not have expected its mortgage-backed debt market to need government support for so long, but the state’s continued assistance was instrumental in ensuring the survival of an important subset of the country’s capital markets.

The same, however, cannot be said of elsewhere in Asia, where the structured finance markets have been reduced to a thin patchwork of mainly ticket receivables. China, where banks are under pressure to reform their approach to credit risk, stands out as the only bright spot amid the gloom.

Having established the support programme in the aftermath of the US sub-prime mortgage meltdown, the Australian Office of Financial Management was still buying into new RMBS issues as recently as 2012. This year, however, that commitment has paid dividends, with mortgage-backed debt emerging as a remarkably stable funding platform during a period of turmoil in the global capital markets.

That has proven important for non-bank lenders, such as Credit Union Australia, which priced and enlarged an A$675m (US$638m) issue in early June against a decidedly volatile global backdrop. Five European investors and one Asian buyer purchased a chunky 30% of Series 2013-1 Harvey Trust with bank balance sheets accounting for 70% of the deal and the remainder going to fund managers and official institutions.

FirstMac, Bendigo & Adelaide Bank and Liberty Funding also completed securitisations in May and June, helping lift the first-half total of asset-backed securities – mostly RMBS – from just A$4.7bn (8.6%) of total Australian dollar supply in 2012 to A$13.1bn (21.1%) in January-June this year.

The market may be benefiting from a long lag time in that it has yet to feel the full effect of global volatility, but the resilience of the RMBS market has surprised many analysts who had expected supply to suffer with the arrival of covered bonds in late 2011. Instead, the recovery in spreads on RMBS has allowed even the country’s biggest banks to diversify their funding sources at competitive costs.

“Typical RMBS buyers are banks, asset managers, central banks and sovereign wealth funds that take the longer-term view. Consequently, RMBS books and secondary price action tend to be stickier, so the market is more resilient at the beginning of global shocks,” said one syndicate banker.

Secured loans

Pockets of activity exist beyond Australia, but Asia’s structured finance market remains a shadow of its former self. The few deals that make it into international distribution networks tend to be small, and look more like secured loans than a traditional securitisation with multiple tranches.

Philippine Airlines has mandated Credit Suisse for a US$150m 3.5-year loan that will securitise credit-card receivables on its US routes. PAL had attempted something similar in early 2012 before the deal was put on hold when local conglomerate San Miguel Corp acquired a stake in the airline. That deal ended up as a bilateral from Credit Suisse.

The new senior secured receivables financing targets the bank loan market, offering top-level all-in returns of 445bp over Libor for an average life of 1.8 years. Responses are due in late July.

Singapore-listed Eratat Lifestyle set a template of sorts earlier in July when it completed the first private placement of asset-backed securities in the offshore renminbi market.

The apparel company placed Rmb134m (US$22m) of 12.5% two-year bonds with 82.5m warrants via Hong Kong broker Sun Hung Kai Financial, which retained a Rmb27m junior tranche and offered Rmb107m of asset-backed notes to third-party investors. The interest rates on the ABS tranches were not disclosed.

Rival bankers saw the deal as a high-yield structured product rather than a traditional ABS, but the complex structure has raised hopes that offshore renminbi investors may welcome more securitised products in the future.

“RMBS books and secondary price action tend to be stickier, so the market is more resilient at the beginning of global shocks.”

However, it is the onshore renminbi market that holds the most promise for Asia’s structured finance industry.

Chinese regulators have been keen to develop a self-sustaining securitisation market for a while, and recent comments from the China Banking Regulatory Commission have underlined the official support for the model as a risk management tool for the country’s banks.

Bank of Communications got the ball rolling in 2012 with the first securitisation of commercial banking assets since 2008 – a Rmb3bn collateralised loan obligation comprising 60 performing loans to 34 corporate borrowers. Although the market is officially still at the pilot stage, the solid response to the senior and subordinated tranches of that deal were a powerful hint of the potential in a country where banks are grappling with rapid loan growth and tougher capital requirements.

China’s corporate ABS market is also catching the eye. The China Securities Regulatory Commission has granted internet giant Alibaba approval to issue up to Rmb5bn in asset-backed securities using special asset management plans. The plan will securitise micro short-term loans Alibaba Finance makes to clients on its ecommerce platforms, making it China’s first public securitisation of SME loans.

While gearing up to test the public market, Alibaba completed a Rmb200m ABS private placement on July 15. That deal was only the second SME ABS private placement in China, coming shortly after China Financial Services’ Rmb120m transaction on July 11.

The first SME fundraisings may be small, but they are significant because they could open another funding alternative for the millions of SMEs in China. In addition, the underlying assets of the new deals are corporate assets, unlike bank assets, which the CBRC tightly regulates.

To see the digital version of this report, please click here.

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