June 17, 2020 / 7:46 AM / 2 months ago

Government backing for Australian securitised bonds fuels investor interest

SYDNEY, June 17 (Reuters) - Strong government support in the Australian securitisation market, one of the Asia-Pacific region’s largest after China, is underpinning a surge in investor interest in mortgage-backed bonds at perceived bargain prices.

Liberty Financial became on Wednesday the latest non-bank lender to issue an increased A$800-million residential mortgage backed (RMBS) deal, taking the total volume of such bonds in the wake of the COVID-19 crisis to A$5.3 billion ($3.65 billion).

“There are certainly people trying to take advantage of the wider spread levels,” said Andrew Twyford, group treasurer at Pepper Home Loans, another lender specialising in non-conforming loans that also issued RMBS bonds last week.

“That’s why we saw very strong appetite.”

The RMBS bonds issued since the pandemic hit the incomes of many borrowers have carried government backing and the support of its Australian Office of Financial Management (AOFM).

The government’s financing arm has invested directly in some of the deals, often at prices below market levels, and has also bought securities in the secondary market to create liquidity.

The AOFM, which bought a portion of Liberty’s bonds, is also expected to provide cheap loans to all securitised deals that might need to fund interest payments if lenders are forced to grant holiday periods to home owners hit by the crisis.

Given the support for the bonds, demand from investors was strong for both Liberty’s and Pepper’s deals.

Last week, Pepper said it had extra demand for the AAA-rated bonds that paid 1.80% margins over benchmark rates, about 50 basis points more than its last comparable deal in October.

But since the bonds are underpinned by mortgagors with incomes at risk from the virus crisis, almost 44% of them self-employed, a decision to buy into the bonds is not risk-free, despite the top-notch rating.

“If you believe in securitisation and if you have the comfort level that the whole structure won’t collapse, then a 185-basis point margin for triple-A rated security is exceptionally attractive,” said John Sorrell, the head of credit at Nikko Asset Management. (Reporting by Paulina Duran in Sydney; Editing by)

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