RMBS issuance has been steady in 2015. People’s Choice recently issued a $500m RMBS where they disclosed pricing on all the tranches - which we include in this note - providing great insight into returns possible in the sector. Generally, we continue to view RMBS as low risk and as a great way to diversify, while providing good cashflow
RMBS market review year to date
Up until 23 October, there have been 15 new RMBS issues totalling $15.988bn. The largest issuer has been CBA with two $2bn transactions, making up 25% of the dollar value issued. Credit unions and regional banks comprised the bulk of the issuance, accounting for 50% of the total. The big four banks issued 36%, while mortgage lenders accounted for the remaining 14% - see the table and graph below.
RMBS issuance in the Australian market 2015 (as at 23 October 2015)
| Name of issue | Pricing date | Volume (A$m) | Issuer | Issuer type |
| Apollo Series 2015-1 Trust | 26/02/2015 | 1,250 | Suncorp-Metway | Credit unions and regional banks |
| Medallion Trust Series 2015-1 | 20/02/2015 | 2,000 | CBA | Big 4 banks |
| Series 2015-1 Harvey Trust | 13/02/2015 | 750 | CU Australia | Credit unions and regional banks |
| Puma Series 2015-1 Trust | 6/02/2015 | 2,000 | Macquarie | Credit unions and regional banks |
| National RMBS Trust 2015-1 | 11/03/2015 | 1,750 | NAB | Big 4 banks |
Resimac Premier Series 2013-1
class A2-R notes reissue | 6/03/2015 | 238 | Resimac | Corporate Mortgage Lender |
Firstmac Mortgage Funding
Trust No.4 Series 2015-1 | 15/05/2015 | 1,000 | Firstmac | Corporate Mortgage Lender |
| La Trobe Financial Capital Markets Trust 2015-1 | 29/05/2015 | 250 | La Trobe Financial | Corporate Mortgage Lender |
SMHL Series Securitisation
Fund 2015-1 | 21/07/2015 | 1,500 | ME | Credit unions and regional banks |
| Resimac Premier Series 2015-1 | 11/08/2015 | 500 | Resimac | Corporate Mortgage Lender |
| Medallion Trust Series 2015-2 | 4/09/2015 | 2,000 | CBA | Big 4 banks |
Securitised Australian Mortgage
Trust 2015-1 | 11/09/2015 | 1,250 | Citibank Australia | Credit unions and regional banks |
| RedZed Trust Series 2015-1 | 10/09/2015 | 250 | RedZed Lending Solutions | Corporate Mortgage Lender |
| Light Trust No.6 | 24/09/2015 | 500 | People's Choice Credit Union | Credit unions and regional banks |
| IDOL 2015-1 Trust | 2/10/2015 | 750 | ING Bank Australia | Credit unions and regional banks |
| Total RMBS issuance $15.988bn |
Source: FIIG Securities, KangaNews
RMBS issuance by issuer type
Source: FIIG Securities, KangaNews
*Total RMBS issuance in the Australian market to date as at 23 October 2015
The recent People’s Choice Credit Union issuance was particularly interesting as the credit union provided details of the returns on all of the tranches, right throughout the structure, whereas many issuers do not disclose the returns on the lowest tranches, see below for further details.
For the novices, it’s worth noting the declining credit rating as you move down the structure and the increasing weighted average life and interest on the notes. The top three tranches have the highest AAA credit rating making them very low risk investments – remember the pool of mortgages secures RMBS investments. The credit rating then declines for the next two tranches to AA- and A respectively, still highly rated investments. The equity tranche which is just $0.7m or 0.014% is not rated and pays a high 1m BBSW + 550 basis points. In this way RMBS investors have a range of risk/ return options available.
In the case of People’s Choice RMBS the lowest tranche is skinny at $700,000 and wouldn’t handle too many defaults although it may be that all of the mortgages have lenders’ mortgage insurance, reducing the risk of loss on the overall portfolio. Further, ‘excess spread’ or interest income over and above the interest cost of the RMBS is typically used to absorb losses before the equity tranche is impacted.
People's Choice prices A$500 million in its RMBS market return
| Volume (A$m) | Credit rating | Weighted average life | Margin to swap | Initial credit support |
| Note class: A1 | 460 | AAA | 2.9 years | 1m BBSW + 105bps | 8% |
| Note class: A2 | 17 | AAA | 2.9 years | 1m BBSW + 115bps | 4.70% |
| Note class: AB | 9 | AAA | 6 years | 1m BBSW + 200bps | 2.90% |
| Note class: B | 11 | AA- | 6 years | 1m BBSW + 250bps | 0.75% |
| Note class: C | 3 | A | 6 years | 1m BBSW + 325bps | 0.14% |
| Note class: D | 0.7 | Not rated | 6 years | 1m BBSW + 550bps | N/A |
Terms Volume - Amount issued at this level.
Credit rating - assigned credit rating to the tranche. Note Class D is not rated.
Weighted average life - refers to an average term to maturity from the date of issuance until each dollar of principal is repaid in full. WAL on RMBS and related structures is influenced by the rate at which principal is paid on the pool of mortgage loans underlying the security.
Margin to swap - this is the interest paid on the notes. The 1 month bank bill swap rate plus a fixed margin.
Initial credit support - Value of loans subordinate to the tranche, that is the value of all the tranches that sit below the stated tranche. For example there is 8% support for the largest tranche. The sum of the tranches that sit below this tranche is $40m of the $500m issue or 8%.
Source: FIIG Securities, KangaNews
RMBS securities are only available to wholesale clients. They are often tightly held, so are often not available for sale. From time to time we have clients who are sellers or are given opportunities to buy parcels from institutional investors.
If you are interested in learning more, please see chapter 12 of The Australian Guide to Fixed Income alternatively, you can listen to our recorded webinar on Youtube
. Or if you are interested in investing in RMBS, please let your dealer know so they can contact you when parcels become available.