Residential Mortgage Backed Securities (RMBS) issuance this year has been huge with plenty in recent weeks taking the calendar year to date total to A$32.13bn. This note discusses the relative appeal of RMBS, auctions by the Commonwealth Office of Financial Management (AOFM), the issuers, the amounts and shows pricing of two recent deals from Suncorp and the CBA
The RMBS market has been running hot with issuance of A$11.23bn since 1 October, more than a third of the A$32.13bn issued in the calendar year to date. There has been a ready market given the possible low point in the interest rate cycle and our theme, along with others, to add floating rate investments. Demand has come from domestic and international investors.
The largest issuer has been the Commonwealth Bank issuing two RMBS, the Medallion Trust Series 2017-1 in June for A$2.4bn and last month, the Medallion Trust Series 2017-2 for $2.65bn.
Other large issuers include - Suncorp Metway with two Apollo Series Trusts combined worth A$2.75bn and Resimac with three issues worth A$2.5bn.
Three others – Bendigo and Adelaide Bank, Citigroup and Firstmac issued around A$1.6bn throughout the year.
For a full list of issuers, see Table 1 below.
Relative appeal of RMBS
As credit margins on bank debt have continued to contract, the relative appeal of RMBS, paying an attractive premium over equivalently rated bank paper has improved. For example, popular ‘C’ notes such as the Suncorp Apollo Series rated ‘single A’, are showing mid point spreads of 250bps versus Suncorp five year senior unsecured bonds with spreads of 85bps.
To give you an idea of higher rated RMBS tranches, ‘B’ notes rated AA have been priced at circa 200bps, with higher AAA rated tranches at 150bps over. See Table 2 & 3 for indicative new issue margins.
The premium is compensation for the structure of the security as well as the perceived difference in liquidity with highly rated bank paper being very liquid, even throughout the GFC, while the RMBS sector needed government support over the same period. This support was not due to poor credit quality. Rather, the Commonwealth purchased RMBS to ensure funding was available to any issuer or RMBS, including smaller ADIs and non bank originators, as a way of maintaining competition in the mortgage sector should these smaller players be unable to fund themselves. That is an indication as to the systemic view the Commonwealth had of the RMBS market.
Note: All yields are quoted at FIIG mid mark.
AOFM auctions off its RMBS holdings
Between 2008 and 2012, the AOFM, the sovereign debt management agency, acquired a total of A$15.5bn of RMBS in support of our banks.
In 2015, the AOFM was directed by the then by then federal treasurer, Joe Hockey, to sell down its stake but stopped the program that year due to lack of demand.
However, demand has returned and together with a recent change in the auction process, led to the most recent very successful auction of A$395m (maximum A$500m in any single auction) residual face value RMBS. According to KangaNews, six of the seven lines offered were sold in full with most receiving significant oversubscriptions even though the AOFM had published its reserve prices in advance.
Previous sales and mainly amortisation has seen the AOFM’s RMBS holding run down to circa A$1.3bn. The next auction of AOFM held RMBS is scheduled for 14 December.
We continue to suggest clients de-risk portfolios by adding floating rate bonds to shorten duration.
RMBS are unique securities that come with various protections.
To learn more please see our recent RMBS series in The WIRE at the very end of the page or call your local dealer.
Table 1: RMBS Issuance
Note this may not be an exhaustive list and total volume issued is indicative only
Indicative pricing – Suncorp Metway
Suncorp issued a new, A$750m residential mortgage backed securities transaction, Apollo Series Trust 2017-2, on 21 September 2017.
The Apollo Series Trust 2017-2 indicative and final deal structure is as follows:
Indicative pricing – Commonwealth Bank of Australia (CBA)
CBA issued a new, A$2.65bn residential mortgage backed securities transaction on 17 November 2017.