Bloomberg News

RBA Rejuvenates Mortgage Bonds With Rate Cuts: Australia Credit

December 30, 2012

RBA Rejuvenates Mortgage

The share of Australian home owners missing payments on their mortgages dropped “significantly” in the third quarter as borrowers benefited from interest-rate cuts and unemployment remained low. Photographer: Brendon Thorne/Bloomberg

Australian lenders will boost sales of residential mortgage-backed bonds by 12 percent in 2013, Westpac Banking Corp. (WBC) predicts, as interest-rate cuts spur a recovery in the world’s second-most costly housing market.

Issuance may reach as much as A$15 billion ($15.6 billion), from A$13.4 billion this year, as yields extend declines, said David Goodman, head of global capital markets strategy worldwide at the nation’s second-biggest bank. That contrasts with Europe, where Barclays Plc estimates offerings will fall at least 10 percent. National Australia Bank Ltd. priced RMBS at 110 basis points more than swaps this month, 30 basis points less than Commonwealth Bank of Australia paid on similar debt in August.

Australia’s central bank has carried out the developed world’s steepest rate reductions since October 2011, stoking optimism of a revival in residential construction and forecasts for rising prices. Home values may increase as much as 5 percent next year, from less than 1 percent in the first 10 months of 2012, Australian Property Monitors forecast this month.

“The RBA is telling us that they want to re-engineer a domestic housing and construction recovery, so with that backdrop we’re pretty comfortable” about the underlying collateral of RMBS, said Goodman. “We expect spreads will be tighter.”

Demand Improves

The share of Australian home owners missing payments on their mortgages dropped “significantly” in the third quarter as borrowers benefited from interest-rate cuts and unemployment remained low, according to Fitch Ratings.

The proportion of home loan payments more than 30 days late fell to 1.36 percent in the three months ended Sept. 30, from 1.54 percent in the previous quarter, the ratings company said in a statement on Dec. 24.

Support from the government has proved unnecessary on five RMBS sales since August, when AMP Bank Ltd. sold the first aid- eligible notes without federal backing since March 2011, according to data from the Australian Office of Financial Management. The government agency has bought mortgage bonds since 2008 under a A$20 billion initiative to spur competition in the home loan market.

“We’ve supported the market and certainly preserved the RMBS mechanism and I think we’ve achieved our aim in that regard,” Rob Nicholl, chief executive officer of the AOFM, said in a Dec. 18 interview. “If there are other investors around and they’ll step in and take our place, then we see that as a sign of a healthy market.”

Covered Bonds

RMBS offerings lagged in the first half of this year as the four biggest Australian banks opted to use their loans as collateral for covered bonds instead.

Commonwealth Bank, National Australia Bank, Australia & New Zealand Banking Group Ltd. and Westpac accounted for 24 percent of RMBS sales this year, down from 53 percent in 2011, data compiled by Bloomberg show.

Members Equity Bank Pty capitalized on this lack of supply in September, paying a 135 basis-point spread to sell mortgage- backed notes in its largest Australian-dollar deal since March 2011. National Australia Bank further cut costs this month, pricing its largest portion of notes at the narrowest spread seen since July 2011 for similar-maturity debt.

Australia’s banks, the biggest borrowers in domestic debt markets, “are in a strong position to see off a slowdown in the economy in 2013, based on their strengthened balance sheet and solid profitability,” Fitch Ratings wrote in a Dec. 16 report.

Jobless Rate

The unemployment rate -- seen as one of the main threats to the housing market -- unexpectedly dropped to 5.2 percent in November and an extra 13,900 jobs were created, the statistics bureau said this month. The nation’s economic growth will slow to 2.7 percent in 2013 from 3.5 percent this year, according to strategists’ forecasts compiled by Bloomberg. That remains more robust than the 2.42 percent average growth predicted globally.

Slightly higher house prices, increasing rental yields and more building approvals suggest property investment may improve, the Reserve Bank of Australia said after its latest interest- rate cut. Lend Lease Group, the nation’s largest developer, applied last month to build multimillion-dollar harborside apartments in Sydney as part of a A$6 billion project.

Dwellings in Australia cost 6.7 times average annual income as of the third quarter of 2011, the second-least affordable behind Hong Kong’s, Illinois-based consulting company Demographia said in a report in January.

Asset-Backed Notes

RMBS issuers face competition for investors’ attention from providers of auto loans, financing for medical professionals and consumer leases. Sales of notes backed by assets other than mortgages swelled to a record A$5.1 billion this year, data compiled by Bloomberg show.

Investors recognize asset-backed securities tend to pay their money back quicker, and the bonds generally offer a higher margin than other structured debt, according to Ross Horsburgh, head of treasury and commercial risk at FlexiGroup Ltd.

FlexiGroup, which provides finance on computers and appliances, paid 150 basis points more than the bank bill swap rate to sell ABS with a weighted average life of 1.32 years in August, data compiled by Bloomberg show.

Firstmac Ltd., a home-loan provider, offered investors 5 basis points less this month for mortgage-backed notes with an average life more than twice as long, the data show.

FlexiGroup will consider bringing a deal to the market next year if conditions remain right, Horsburgh said.

Extra Yield

“ABS will be attractive relative to RMBS given the spread pick-up for shorter-dated paper,” said Raymond Lee, a Sydney- based portfolio manager at Kapstream Capital, adding that the notes also help investors diversify away from mortgages. “But I don’t think it will damage demand as ABS deals are not as abundant as RMBS, and are also much smaller.”

Investors are seeking higher-yielding debt as interest rates on Australian financial notes fall to the lowest on record, according to Bank of America Merrill Lynch indexes. The rate has fallen 201 basis points this year to 4.30 percent as of Dec. 28. Globally, lenders pay an average 2.48 percent, 231 basis points less than on Dec. 31, 2011, the indexes show.

Mortgage providers may look to take advantage of this demand in 2013.

“RMBS still offers very good value,” according to Eva Zileli, a senior manager, secured funding, in group treasury at National Australia Bank. “We would hope to come to the market next year with another ABS deal and another RMBS.”

To contact the reporter on this story: Rachel Evans in Hong Kong at revans43@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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