D AV I D S M Y T H
SPONSORED ROUNDTABLE
INVESTING IN LOAN
DATA TRANSPARENCY
In the aftermath of the GFC, it became apparent
that lack of transparency had led to mispricing
and the subsequent illiquidity in the residential
mortgage backed securities (RMBS) market.
Regulators globally have responded with
initiatives such as mandating the provision of
loan-level data by RMBS issuers.
For example, in 2010, the Governing Council
of the European Central Bank (ECB) included
mandatory loan-level data reporting for asset
backed securities (ABSs) as part of the
Eurosystem’s collateral framework. Similarly,
from November 2011, issuers of new RMBS
and covered bonds in the UK were required
to provide loan-level data to maintain repoeligibility with the Bank of England.
The American Securitization Forum launched
Project Restart in July 2008, with one of its
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principal goals to increase and standardise
issuer disclosure.
The Australian market has lagged in
providing loan-level data for mortgage-backed
securities. However, on 22 October 2012 the
Reserve Bank announced new eligibility criteria
for the RMBS market, whereby an issuer that
wants to maintain repo-eligibility will need to
provide standardised loan-level data. While no
definite timing has been announced, there is
reason to believe that this will coincide with the
RBA’s Committed Liquidity Facility, expected to
start in 2015.
Against this backdrop, MARQ and AB+F
convened an investor roundtable to discuss
mandatory provision of loan-level data and a
range of other issues that are front of mind for
RMBS players.
Andrew Stabback: Let’s start with the most
current event, an Australian judged ruled
against Standard & Poor’s. What are the
broader implications of the court ruling for
the financial market? What are the practical implications of S&P successfully appealing the court decision, in effect shifting the
responsibility of investment analysis back
investors and issuers?
Amy Mangan: As an investor, we have our
own rigorous credit processes, so we don’t rely
on rating agencies for our assessment of the
risk. It won’t change our process, but of course
ratings often drive mandates.
Ileria Chan: We have our own process. In this
respect, we use rating agencies as just another
resource to look at a particular RMBS. Ratings
are, however, important in that a lot of our
mandates include ratings as part of their limits or restrictions, and so, in that regard, it is
important when we look at an agency’s ratings.
Jim Fingleton: The primary issue about this
case is that the court made a finding of fact in
relation to the rating process in the particular
instance. Perhaps rating agencies may have to
justify how they arrive at their ratings and,
importantly, they will not be able to rely on
US Constitutional free speech concepts in an
PARTICIPANTS INCLUDED:
Graham Andersen, executive
director, MARQ Services
Steve Adamek, principal, Outsource
Support
Peter Casey, deputy treasurer,
ING Bank
Ileria Chan, senior credit analyst,
Tyndall Investment Management
Andrew Chepul, executive director,
Columbus Capital
Jim Fingleton, head of credit relative
value, global capital markets,
Westpac
Jason Finlay, division director,
Macquarie Bank
Standing (l-r): Andrew Stabback, Peter Casey,
Andrew Chepul, Jim Fingleton, Amy Mangan,
Jason Finlay, Tony Togher, Pamela Bwoch,
Phil Sullivan, Steve Adamek, Todd Lawler,
Ileria Chan, Craig Parker, Sebastien Chatelier
Seated (l-r) Graham Andersen, Nick Procter,
David Howard-Jones, Stephen Magan
David Howard-Jones, partner, Oliver
Wyman
Todd Lawler, group treasurer, Pepper
Stephen Magan, vice president,
securitized products group, JP
Morgan
Amy Mangan, assistant investment
manager and credit analyst,
Aberdeen Asset Management
Craig Parker, head of structured and
asset finance, Westpac
Nick Procter, director of sales,
MARQ Services
Phil Sullivan, director, Macquarie
Bank
Tony Togher, head of short term
investments, Colonial First State
MODERATOR :
Andrew Stabback, managing director
and publisher, AB+F
Australian court. Here they paid the price of a
shortcut to rate a product very quickly, probably motivated by other factors.
And so going forward I think people
should always look at a rating as someone’s
opinion only and critically question the basis
under which that opinion was formed.
Andrew Stabback: And that’s always been the
rating agency’s defence hasn’t it? ‘This is our
opinion, but you’ve got to do your own work’.
But as pointed out in this case, there was a lot
of gaming going on.
Steve Adamek: The essence of credits analysis
is both an art and a science, so there’s a lot
of judgement involved. The beauty of getting
credit opinions from rating the agencies is they
rely on historical precedents of what they’ve
done. With CPDOs there were no historical
precedents and there was no reason why they
should be cutting any corners whatsoever or
giving a rating based on something that’s so
new. But when you’re dealing with RMBS or
with corporates, they’ve got a long history of
data, processes and checks and balances that
allow these things to work.
Tony Togher: I think over the last decade it’s
fair to say that most institutional investors have
realised that they can’t abrogate their responsibility to rating agencies. At least I haven’t met a
client who’s willing to allow us to do that. Most
institutional investors realise that they must do
their own fundamental prep and analysis and
come out with their own opinion. It’s nice to
get opinions from a variety of rating agencies
and other commentators, but the buck stops
with the investment manager.
Todd Lawler: Just from an issuer’s point of
view, I’ve worked with all of the agencies and,
from my point of view, they add a great level of
validation to what we think we already know
about our pool. What’s encouraging is that
we are able to have proper discussions with
the agency and they are very professional in
terms of following their process and it’s a well-
trodden path in the RMBS world.
What is encouraging on the flipside is for
the deal that we’ve just done, we approached
institutional investors all over the world and
have never had the level of detailed questions
come back on the characteristics of our pool.
Nick Procter: Can I offer a contrary point?
I think there are investors that still rely too
much, but perhaps not exclusively, on rating
agencies. So I don’t think we should pretend
that everyone in the market does a huge
amount of credit work.
Andrew Stabback: I think that’s an important
point. Particularly in the last four years, how
have you seen the requirement change from
the investors’ perspectives and what have the
implications been for your business?
Andrew Chepul: For an issuer, the ramification is the expectation that they be an open
book, although we do hear comments that
there are certain issuers out there who do not
provide all the information that’s required
from an investor’s perspective. That’s why, if
you’ve got new benchmark tools, it’s going to
be of benefit to an investor to have additional
sources of information and reference points.
Todd Lawler: I also find a lot of the questions
that I get from institutions, not necessarily all
of the investors, but some of them, are very
much akin to the rating agency process. A
lot of them are using the agencies to validate
their own processes. Let’s not forget that one
of the things that all of the main agencies here
have done in the last couple of years is they’ve
changed their criteria, which means more
subordination in our deals and they become
more expensive.
Nick Procter: Todd raises a really interesting
point: Is it sufficient for people to replicate the
analysis that the rating agencies have done? If
your analysis is simply to mirror what the rating
agencies are doing, is that independent analysis?
Steve Adamek: It’s depth of resources. You’ve
got to get into [an agency] to understand their
models, how they work, understand what the
inputs are and the outputs and see whether
you agree. Get on the phone, talk to the analysts and keep going. Trying to do more than
that is nearly impossible because you’ve got
two days to look at [a deal] and then it’s gone.
But the other side a lot of investors don’t
have a process to relook at the pool, or look
at the entire portfolio, or be able to analyse
the data going forward. That’s because the
perception of credit is ‘look at the point of
origination’. It’s not just that, you’ve got to
look at it each month.
Andrew Stabback: What is the link between
transparency and liquidity, and how do you as
investors value that?
Steve Adamek: Well firstly you’ve got to
define liquidity – my definition of liquidity
is whether the banks’ balance sheets are getting bigger. The capital market is famous for:
everything is liquid until such time as something goes wrong and then it’s illiquid. Now
if you, say, ignore liquidity, then someone
should be able to produce a hold to maturity
price. And that would open up this market
amazingly because if you’ve got all this information coming in that’s standardised, then
you can compare it to the benchmark pool.
The importance of transparency and consistency – to be able to get all the data together
– is paramount to liquidity in that sense.
Graham Andersen: I would make the point
that effectively the ratings were behind the
commoditisation of mortgage. That is why in
the US they were securitised in great number
with a large range of risks. But the problem
was of course was there was no quality control on the rating agencies and exactly how
mortgages went into the black box and this led
to gaming. Mortgages will again be commoditised in the future once you’ve got reliable data
and a measure which is understood.
Todd Lawler: A mortgage is an inherently
very complex instrument and I think that
it will be commoditised to some degree or
LOAN-LEVEL DATA
AUSTRALIAN RMBS INVESTOR SURVEY
Ahead of this investor roundtable, MARQ Services, in conjunction with Oliver
Wyman, surveyed Australian RMBS and covered bond investors for their views
on loan-level data standards and analytical capabilities. Of the 23 responses
from firms in key investor segments, only 20 per cent said they received
loan-level data for “most” of their RMBS and covered bonds investments
at issuance, with just 10 per cent receiving this data regularly afterwards.
About 50 per cent of respondents believed collateral loan-level and pool data
analysis is paramount. A major reason for not undertaking collateral analysis
is the unavailability of required information. Hopefully, the current initiative by
the RBA and global regulators on loan-level data will help bridge this gap.
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SPONSORED ROUNDTABLE
another at some point in the future only with
the right amount of detailed information.
Graham Andersen: You could argue that –
besides going too far into risky assets–securitisation created a lot more available funds for
people who couldn’t previously borrow and
home ownership in the US went up considerably as a consequence.
Todd Lawler: I think there were aspects of it
that were very good. The one thing that was
lacking is that every single asset was treated
as a fungible, the same thing. If there was a
way of scoring those, for example, in a way
that was market accepted we might get some
more sensible pricing and processes to make it
a market standard.
Andrew Stabback: So, to what extent does
mandatory provisions of loan level data translate to transparency?
Steve Adamek: We’ve got a deal in the market
now that doesn’t have a self-employed spilt, it
doesn’t have first home buyer split, it doesn’t
tell you much about the refinancing. I mean,
you want those bits of data to compare pools
at origination and going forward all the time.
Credit changes next month and the month
after. You’ve got to stay on top of it. If you
don’t have comparable data you can’t do that.
So, if people won’t give it to you, make it
mandatory and get the products to actually
manage that. Transparency will make a more
honest, more doable, market, so I’m all for it.
Andrew Stabback: There’s an investor’s
view. What are the views, from an issuer’s
perspective,on mandatory provision of loan
level data?
Peter Casey: I think there’s a balance to
be struck. Is all of the data on a loan that
was written five years ago still relevant? We
assessed that person’s borrowing capacity at
the time, based on their circumstances five
years ago, number of dependents, expenditure they had, other commitments, number
22
of credit cards, none of that is disclosed in the
standards at the moment
We should not ignore the liability side of
the structure while focussing solely on the
assets. We also have the issue of servicer information. I think there’s value to be had from
investors coming to see issuers and actually
stepping through the process, spending some
time to understand the policies and the way
that loans are underwritten.
Stephen Magan: I definitely don’t want to
take away from the fact that loan level data is
a step in the right direction, but when it comes
to transparency, it’s one factor amongst many.
Peter Casey: Steve, I think you can get most
of what you need from a fairly small subset
of data. But, you get to the point where each
additional data field is giving minimal additional value to decisions that can be made. So
I think it’s more important for the investor
to understand how we originate a loan rather
than how much that borrower was earning
five years ago.
Steve Adamek: I just think of it as soft data.
I would like to see a service report on every
issuer done by the agencies, because I don’t
want to get into that detail on every deal.
Let’s move to the transparency of the LMIs,
we rely so heavily on LMIs but get nothing
on what they’re paying out, what regions they
affect. That just isn’t available. I think that’s
even more important than the loan level data
because the reliance on that for ratings purposes is huge.
Andrew Chepul: There needs to be a bit of
an overlay with MIS (management information system) reporting requirements from
issuers as part of this whole standard. The
Securitisation Forum has some guidelines,
as well as prescriptive requirements around
reporting. I think the comment about LMIs
is an interesting one because, with regards to
credit specific requirements around collateral,
I think there should be a common form.
Nick Procter: To set up standards, how do you
satisfy those concerns?
David Howard-Jones: There’s also a major
issue of transparency, of course, which has
created the potential for issuers to put bonds
into the market that were underpriced and so
investors weren’t being paid for the risk taken.
Now, the ECB has a hundred data fields
and the question should not be whether
Australia needs more transparency or more
data, but how many data fields is right. I think
we can have valuable debates around the
minimum number of data fields and how to
manage some of the issues, but there should
be convergence on what are the right number
of data fields needed in Australia.
Andrew Stabback: It’s a good point you raise
about the international standards and one the
and one the Reserve Bank has raised in the
last few weeks. Can we get some views around
the table on this?
Andrew Chepul: I think the one thing that
needs to be taken into account is jurisdictions– offshore v. locally – that there are different requirements.
Andrew Stabback: International investors at
the ASF Conference a few weeks ago were
very keen on the Australian product but at the
same time if we haven’t got the loan-level data
that they’re requiring, it’s going to create a lot
of friction.
David Howard-Jones: We benefit from the
work the ASF did and it was mentioned earlier
that the ASF has been working on standards
for a while now. Now the RBA has asked for
a modest amount more and, as a firm, we can
see exactly why the RBA wants that.
There are certainly issues around privacy
of data.
To the international standards, we have
significant opportunity now the RBA standards out to actually unlock some markets.
So in Europe, as a regulated fund, you can’t
invest without doing your own credit analysis.
There’s no easy way for them to do their own
credit analysis, so basically they can’t invest
in Australian assets now, because they can’t
do credit analysis.
Andrew Stabback: And that’s been there for a
long time, hasn’t it?
David Howard-Jones: If we have data requirements that make it easy for people to invest
again, that’s an important point for the economy’s funding needs through the banking sector. We have a need to sell Australian RMBS
offshore to feed into that. We actually need to
be able to unlock those markets and address
those transparency requirements.
Todd Lawler: We found when we recently
just went to the States with our latest issue
and spoke to a lot of investors, there was the
expectation that even though we had a shortdated money market tranche, we would make
available loan-level data. They all requested
the ability on future and monthly payment
dates to get a detailed investor reporting.
I think to get funding offshore regardless
of what the rules are here, we are going to have
to be able to provide loan level overseas.
Jason Finlay: We’ve had a US mortgage business for 10 to 12 years now and our experience
there is people are looking at loan-by-loan
criteria, to actually select loans to buy.
Andrew Stabback: And that’s where the
Australian market activity is mainly going to
be in the immediate future as well, so there’s
probably more value to be added to that.
Jim Fingleton: And it’s a resources thing as
well. It’s a different class of investor and they
do the amount of due diligence that they need
to do.
Now any of the analysis we do in all of
the products we look at, what we do is make
sure that the BB (if there’s a double in this
tranche) and the BBB in the structure are
robust enough to still be there. We’re not sen-
sitive to rating, but politically most organisations are sensitive to the rating because they
view a downgrade as a bad thing. There may
not be any losses but it’s downgraded and it’s
suddenly riskier than it was yesterday. That’s
the work that we’re doing, looking at the very
bottom of the structure.
Phil Sullivan: But the downgrade has a real
cost doesn’t it? Because it would increase the
capital that you’re carrying.
Jim Fingleton: Yes it does, but if it’s hit my
P&L already, I’ve already worn the cost of that
happening. So for me it’s the time you have to
spend on managing that process when there’s
been a downgrade of a transaction.
Craig Parker: I think locally we’re waiting
for two things, we’re waiting for APS 120, or
the local version of Basel III. In securitisation
terms that means what can banks hold in the
liquid book. There’s some guidelines at the
moment, but will APRA push banks towards a
certain restriction for example on RMBS and
be that internal or external RMBS.
The second thing is we need some certainty about whether RBA will end up with
their reporting requirements. If the RBA
comes out and says ‘you need to have all of
these 82 fields or you’re going to get punished
quite severely in the repo haircut’, then potentially we have a problem as an RMBS market.
We need something that is reasonable that
gives issuers an incentive to provide good
quality, wide-ranging data, but doesn’t shut
RMBS out of the market as a funding tool.
Peter Casey: I think APRA will come out with
those incentives, be it hard or soft rules. The
CLF – Committed Liquidity Facility – will be
scaled basically on APRA’s view of how hard
you’ve tried to lengthen the tenor of the funding. So you can’t just sit back and increase the
size of your internal deals without trying to
raise external funding and RMBS is a part of
that external funding. There’s definitely the
structure in place for APRA to give issuers
incentive to keep issuing rather than to just
stock internal RMBS.
Steve Adamek: It seems to me opening up
a master trust solves the banks’ problems
because you can structure something that
gives you a funding instrument and the ability to meet both the banks’ needs and the
investors’ needs. Does anybody else see it the
same way?
Andrew Stabback: What’s the prevalence of
master trusts overseas?
Graham Andersen: Well the UK has the biggest master trust market and all of the major
banks and mortgages are funded through
master trusts.
Stephen Magan: We’ve done a lot of work
on master trusts. We’re sitting on the ASF’s
subcommittee for master trusts at the moment
really trying to flesh out what master trust
structure works best in Australia. I think that
master trusts post-crisis have been successful
in the UK particularly with respect to helping bring in offshore investors. Most recently
there’s been a number of Japanese investors
that are coming in and investing in volume in
the UK master trusts. We strongly believe that
the introduction of master trusts in Australia
will facilitate the participation of offshore
investors, in particular Japanese investors.
Andrew Stabback: To me it seemed a no
brainer that standardisation of data would be
a part of the market here, four or five years
ago. It seemed to be obvious that issuers would
be able to provide investors all the data they
required when they required it to be in the
game. But it seems to have been a long, hard,
slow road to get to this point
Steve Adamek: There’s no such thing as a
homogenous capital market investor. Each
investor has a different mandate, different way
of doing things, and a different philosophy,
so to try and homogenise the product is very
difficult
You need groups like this and the ASF and
so forth to just keep pulling people together
until such time as it’s realised. Now this is
important for us going forward.
Andrew Stabback: Tony, we’ve had this discussion over the years that the amount of
credit analysis you can do on an ongoing basis
is a constant burden and cost for the business
but it’s an important part of your business. Is
the standardisation of this data going to be a
significant benefit to you, as an investor?
Tony Togher: Yes, it will bring benefits. Let
me say at the outset though, over the last
three, four, five years since the crisis set upon
us, I’ve not had any problem getting whatever
type of data I want from whoever. Not always
immediately, but it’s certainly been forthcoming. What I like about the minimum standard
of data set being in place across the market is
we’re realists and it’s not always going to be as
easy for investors to demand things, although
over the last five years it’s been easier.
Andrew Stabback: And that’s what’s driving
the Reserve Bank isn’t it?
Tony Togher: Yes. So if there is a minimum
standard of data requirement, well, that to my
mind is a good thing. It doesn’t mean that it
will provide all things to all people. As Steve
says, every investor looks at things in a different way and there might be nuances within
the data that they want to focus in on for their
own reasons and that might not fall into the
minimum criteria, yet they will still want
access to it.
Andrew Stabback: Does it lead to a better
understanding of risk and ultimately more
liquidity? Are we on the path towards getting
more liquidity in the market? We all know
that’s a bit of an issue or is lack of liquidity
driven by different things?
Tony Togher: I think it assists liquidity, but
everyone has a different idea of liquidity in
their own mind and their requirements for
it. Most investors over-estimate their requirement for liquidity. I just think that’s a fact
of life. It’s that insurance policy against the
unknown. That’s not to say you don’t want it,
it’s just that you require it for a number of reasons, sometimes past experience, sometimes
expectation. But I don’t know that we’ll ever
get to a level of homogeneity within the RMBS
space where we can say it can price as well as
– or be as liquid as – Commonwealth bonds
or even bank NCDs. There’s an expectation
in the market place that major trading bank
trades at a constant rate, whatever BBSW is on
the day, for the four major banks and they’ve
got $165 billion plus outstanding that turns
over regularly. That, for me is a market operating in what they believe to be a homogenous
space. I don’t know whether RMBS lends itself
to that because of the disparate nature of the
underlying collateral.
Andrew Stabback: Does having the standardised data set widen the investor pool and
therefore support you as an issuer?
Todd Lawler: If you’re sitting on the opposite
side of the desk, and you can have a benchmark to reference against, it’s a much easier
conversation from an issuer’s perspective. But
issuers should also look at it from a benchmarking perspective internally. With regards
to having different types of pools, an issuer
should be sophisticated enough to say ‘well
I’m not just looking at it from a perspective of
funding, but I should be using it for my internal purposes as well’.
Andrew Stabback: Craig, your views on standardised data set and where we’re at, and why
it’s taken so long to get to this point?
Craig Parker: Well I think the RBA has come
out and put a line in the sand to be able to
have that total transparency. There are organisations that are built to do the analysis on a
ground-up basis and then there are organisations that just don’t have those resources.
So for some organisations they probably
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SPONSORED ROUNDTABLE
don’t need to encourage integrated transparency because they get the data, whereas
other organisations perhaps were not getting
the data or perhaps weren’t even asking the
right questions. I think that it just creates a
minimum standard from which we’re going
to operate and I expect that someone like Tony
is going to ask all the questions he otherwise
would have asked.
I just think it creates that minimum standard, greater transparency. I do have my own
view that it would encourage investors to the
extent that there is greater interest in fixed
income more generally that people would
begin to look more so at RMBS, because
RMBS is going to have a certain price point
relative to a covered bond etc
Andrew Stabback: But has RMBS been caught
up with the backwash of the ABS failures of
the GFC?
Craig Parker: We’re just getting caught up
in it. I think if we do create those minimum
standards I think that some investors might
come back. You might get greater allocation
to ABS to mandates perhaps,if investors get
more comfortable, together with the fact that
the price on other products gets tight. I hope
that my super is not in covered bonds because
I’m going to have to work until I’m 70 to get a
half decent return.
Jim Fingleton: David touched on this before,
basically standard data set means you can build
a model or models for transactions. You’ve got
it sitting there, when you need to do something
you actually can. Invariably you don’t look
at every transaction every month, you know
where your hotspots are, you know when you
need to worry about things and you focus
attention on the things you should concern
yourself about
You wish you don’t need it, you wish you
don’t want to use it because you want everything
to go really well, but when you’ve got the data
you can go bang and you can drill down pretty
24
quickly. Find the data, you’ve got it line-by-line,
standardise, you churn it out and it’s there.
Andrew Stabback: Steve said credit analysis
is an art and a science. Is this the first step
towards making it more of a science? Not to say
there’s a degree of art because these are complex investments and they can be really complicated structures and all that sort of stuff, but
do we move towards a market which is more
a science, do we move towards a data driven
decision making market as a result of this?
Steve Adamek: The data has always been
there. I’ve always had this data with notable
bits missing. But it’s just that the art is Tony
is going to think differently about investment
than I do. Jim’s going to think differently.
We’re all going to think differently and apply
our own philosophies and strategies onto of
it, that’s the art. But getting standardised data
adds to the science of the philosophies and
the strategies
Andrew Stabback: Two good points there –
risk management tool, when you need it, and
the ability to go further and deeper and more
the art side of investment and the science is
more formulated.
Graham Andersen: The point about standardised data is first of all its reliability but
also the ease in cost of access. Part of what
we’re doing is creating first of all a methodology system where you can actually rely
on data that’s actually collected. And again,
apologies to the market generally, but our
analysis of the data that is provided says that a
lot of it is unreliable. We’ve analysed lots and
lots of issuer data that’s being provided. That’s
actually quite significant.
So processes are required where data can
be verified and a verification process. Part of
what the RBA is doing will mean that there
will be a process in place. Then the ability to
access it easily through a database so you’re
not dealing with a lot of issuer systems. It’s
very, very important. Of course you have the
European database as a precedent.
Unfortunately in the UK they haven’t actually done it that way. The Bank of England has
the database and it has all the data in their own
system but it’s not publicly available. If you
want data in the UK you have to go to issuers.
When you talk to the smaller investors it’s
almost impossible for them to really do proper
analysis, because even with the requirement to
provide the data, it comes in so many different
formats, the ability to manage it is so difficult.
When you talk about standardised data,
we should also include the delivery of that
data through a system that proves it’s reliable.
at the time.
Having a standard set of data then very
easily allows me to say, this is why what I’m
proposing will work for you.
Nick Procter: I think a natural evolution
for getting standardised data is people that
provide tools that allow various market participants to do something quickly, easily and
efficient with that data. We’ve been around a
lot to see investors and a lot of investors say
I’m not a huge fan of getting loan level data
and actually, if you dig a bit further, what they
mean is I don’t have the means to do something meaningful with that loan level data.
Todd Lawler: I see current market conditions
as being receptive to our asset class, which
is why we tested the market and then went
out with our recent issues. Investors have for
many years been building up cash and they’re
now looking for yield where they can find it.
So I think our asset class is attractive right
now and hopefully long may it continue.
Andrew Stabback: Todd, that brings me back
to you, is there an advantage for someone in
your space, which is a bit further down the
curve in having standardised loan level data?
Does this help your business even further or
am I misreading that?
Todd Lawler: Yes, I honestly think that any
level of data that I can put out there that allows
me to say here’s why I think what I’m putting
into this bond is of good quality or will work
for your needs, it allows me to easily communicate to a great number of investors.
To me it’s really important when I speak
to an investor to find out what their needs
are. I may know this group of investors really
likes a super senior tranche, or that group of
investors likes a short-dated tranche. So I can
look at my universe of investors, look at my
collateral and then I can manage and structure up what I think will work for the market
Andrew Stabback: We’ll go around the table
and comment on where you think our market conditions are now and just give us a
bit of a view forward. I thought the ASF
Conference this year showed that the international investors were quite optimistic, more
than I expected
Todd, I might start with you, how do you
see the current market conditions and are you
optimistic about how we’re going forward?
Stephen Magan: I think we’ve had probably
three or four good months after five pretty
tough years.
Andrew Stabback: Too early to get optimistic?
Jason Finlay: Margins are better than where
they were at the start of the year or the end of
last year. Bigger deals are getting done and deals
are getting done without the AOFM and there’s
some new business coming in. Definitely there
are some positive signs, but still some way to go.
I think it’s an attractive asset class for investors,
but look at the spread that they can earn versus.
covered bonds, and I think there’s probably a
degree of correction to still come and work its
way through in the RMBS markets.
Jim Fingleton: Yeah, I think the days of distressed markets where I enjoyed the attractive
pricing opportunities are actually on their
way out. There’s a lot of quite aggressive
institutional bidding on paper, primary and
secondary all the way through.
I guess there’s a question of how much is
the so called liquidity premium within RMBS
product that really maybe shouldn’t be there
and how much is the actual credit risk component of the transaction and the covered v.
RMBS pricing is an issue?
Ileria Chan: I don’t disagree what has been
said. RMBS and ABS remain very important
components within our portfolios. Spreads
have come in quite a bit but not as much as for
many other bonds or FRN. I still think they
are good value in terms of running yield.
Securitisation remains a good asset class,
specially at the AAA level. We are cautious
but optimistic.
Phil Sullivan: In terms of PUMA public
securitisations, we haven’t actually been in the
market for over a year because of the growth
in our deposit volumes. But we have been
testing the market for tactical reasons and
I’ve been very enthused by the feedback we’ve
been getting in the last few months compared
to seven or eight months previously. I do
however think the regulatory environment
presents some challenges.
Andrew Stabback: Are you talking about
regulatory certainty?
Phil Sullivan: As a bank issuer, I’m talking
about the challenges in balancing what we can
issue, in line with the regulatory environment,
with what investors want.
Andrew Stabback: Tony, you’re an experienced investor how do you see the current
market?
Tony Togher: As hard as it is for me to admit,
spreads have come in. It’s a more buoyant
environment at the moment and there’s a little
more investor confidence, confidence on both
sides of the table.
I think one of the main reasons for more
recent activity and broader investor demand
for primary issuance has come from the fact
there’s little in the way of secondary issuance
left. Many investors previously enjoyed the
conditions, particularly with balance sheets
moving out of this space in Europe.
Andrew Stabback: Can I push you on that?
The Australian RMBS sector in the last four
or five years has continued to perform and
the credit quality has continued to be very
strong. Has it proven itself through this very
difficult time and is that giving you a high
level of comfort?
Tony Togher: For me, it is today, it was yesterday and it will be tomorrow a function of
the underlying economy. Low unemployment
rates means people don’t default on their
home loans. While we’ve enjoyed those conditions here in Australia that hasn’t necessarily
been the case overseas and I think we’ve seen
dislocation in various asset backed or mortgage markets in places around the world based
on that level of unemployment or the volatility
from those unemployment levels
The Australian residential mortgage market has proven itself over the last 30 years. You
don’t have to look at the securitisation market
you look at the ABS stats and the default rate
over 30 years is two fifths of nothing. Time
will tell what those are in more stressed economic times.
Andrew Chepul: Covered bond margins are
compressing and unsecured is coming in.
There seems to be a lot of positive sentiment.
But you know it’s always hard to predict.
We’ve got macro issues to contend with in
this industry so it’s pretty hard to predict
anything in securitisation, that’s one thing
that I’ve learnt.
Andrew Stabback: Love volatility.
Andrew Chepul: Yeah, well volatility seems to
be constantly there.
Steve Adamek: I think there’s a lot more
confidence going in, but you know in the
real world there was a large ball of money
rolling really fast and became a small ball of
money rolling slowly and that to my mind is
still working through the system. I just see
this last four months of confidence basically
because historically recessions have only gone
for five years and we’re at the five year point
so everyone is going, oh it must be nearly over.
Bit of a psychological thing. But there’s heck
of a lot more problems in Europe still and
there’s a heck of a lot of problems that… a lot
of money, trillions of dollars disappeared out
of the world economy and I just tend to think
everybody should be more cautious and take
their time to sort of jump back in.
But definitely in this space in Australia
we’re seeing a lot more interest in this space,
lot more appreciation in this case, but still a
lot of ignorance.
Amy Mangan: We’re long-term investors in
RMBS and we will continue to be. Definitely
seeing value relative to other asset classes.
Certainly the move to increase transparency
and loan level data is imperative for us to be
able to analyse the risk and price risk. I think
that increased transparency should help with
primary issuance pricing and being a little bit
more accurate.
Craig Parker: I think there’s a range of things
going on that I think are going to impact the
market. Whether it’s APS120, or the liquidity rules. Then there’s what’s happening on
credit growth in Australia. Then at a very
micro level – call it senior unsecured v. ABS
– why wouldn’t you pile into asset backed
securities?
ABS will start to follow not necessarily the
covered bond price, but at least move in that
direction. As a function of that with hopefully
growing credit demand within Australia we’ll
get a more buoyant market. I think again in
terms of the diversity of activities things like
the master trust where organisations get out
there with other asset classes, I think a vibrant
market is about a range of products, strong
secondary market, pricing that’s rational and
to the extent that the community wants fund-
ing our markets can play a major part in it.
I’m very much the optimist albeit I do
think prices will come in.
Andrew Stabback: David, some good developments over these last few years, they’ve been
hard ones, how do you see the future of the
market and how are we positioned it?
David Howard-Jones: I think the biggest
issue for us is what Steve mentioned, which is
that we’re not out of the woods in terms of the
massive imbalances in our economy,
We still have issues for us in Australia
as we remain a small economy, largely internally funded in the RMBS market and then
overseas through the banking sector. Tony’s
probably in for some luck and spreads will
probably widen before they stay narrow. My
guess is that we’re in for protracted instability.
On the positive side, transparency can
only be a good thing because for all the
debates around the quality of the Australian
housing market and whether there’s a bubble
or not, there’s an enormous amount of very,
very low risk lending out there. The low risk
lending, the transparency should mean that
funding is always easy to come by.
I think that story is not well understood and
certainly Australia is seen as risk on play. I think
transparency can help us get the story across.
Nick Procter: My final comment is actually
more a question for the group. My reading of
Guy Debelle’s presentation at the ASF was that
he was saying that to be repo eligible you’ve got
to make your loan level data available. He said
“publically available”. I’m not sure what that
means. If it generally means publically available, I think we’re on the cusp of something
really substantial in Australia in that we’ve got
very little loan level information in this country. We suddenly move to a position where we
have great deal of information on mortgages
in this country. I think there’s all sorts of
interesting possibilities if that information is
publicly available.
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