Does Aussie mortgage bond sell-off spell trouble?

No reason to panic, non-bank treasurer explains

Does Aussie mortgage bond sell-off spell trouble?

As funding costs rise market-wide, a recent bulk sell-off of Australian asset-backed securities by offshore investors could give rise to concern over squeezed margins in the non-bank sector.

But as trading of asset-backed securities is a normal event, the apparent rushed sell-off should not be considered in isolation as a sign of market weakness, Pepper Money’s Treasurer says.

The non-bank lender’s comments are in response to a story published by the Australian Financial Review on Monday. Offshore investors of Australian asset-backed securities auctioned $645 million of bonds last week in an apparent “rush to raise cash”, the publication said.

The bonds were reportedly issued by non-bank lenders such as Athena Home Loans, Pepper Money, Zip Co and Resimac, which were conducted via five BWICs (bids wanted in competition auctions) held throughout last week.

According to the publication, 40 lines of bonds from “almost every non-bank issuer in the Australian market” were offered for sale, at a face value of $645 million. The sell-off reportedly raised $500 million, suggesting discounts were offered to attract interest.

The sell-off occurred amid current turmoil in the UK’s pension fund industry, spurred by an announcement by UK government chief financial minister, Chancellor of the Exchequer Kwasi Kwarteng on September 23, who unveiled £45 billion of tax cuts.

Reportedly the biggest tax cut package in half a century, the now notorious “mini budget” triggered a chain of events, notably a recent surge in gilt yields (UK government bond yields), particularly at the long end. The Bank of England was forced to intervene, stepping in as a “buyer of last resort”.

Read next: Virgin Money, other UK lenders in shock mortgage halt

In an apparent display of urgency, one auction included a line of $15 million AAA-rated securities from a bond issued by Athena Home Loans, the Australian Financial Review reported. It was said to have been placed with investors on September 20 - two days before the scramble to raise cash occurred.

Auctions of Australian mortgage bonds reportedly took place either side of the Bank of England’s intervention, including on Thursday evening Sydney time. 

With interest rates on the rise, much has been spoken about funding pressures, including those on non-banks, whose funds are sourced through wholesale debt markets.

In response to whether the market-wide rise in funding costs put non-banks at a disadvantage, Mortgage Ezy and Pepper Money recently told MPA non-banks are structured differently to main banks, enabling them to assess loans on their merits. Due to the way non-banks are funded, non-banks can offer lending solutions outside of traditional bank offerings, and to broader market segments, the non-bank lenders said.

Read next: Are non-banks disadvantaged by escalating funding costs?

Pepper Money Treasurer Anthony Moir (pictured above) told MPA the trading of asset-backed securities is a normal event that occurs frequently during normal market conditions.

In itself, it doesn’t represent a sign of market weakness or concern, he said.

“Sellers of such assets undertake liquidations for many reasons, which may include cashflow management for underlying funds or to transition to markets offering better opportunities (or better relative value),” Moir said. 

“The scale and speed in which these assets have been sold is a positive reflection of the strength of the Australian securitisation markets and Australian economy.”

Read next: Pepper Money weighs into funding cost debate

On October 6, around a week after British investors offloaded the Australian mortgage-backed securities, Pepper Money priced a $750m residential mortgage-backed security transaction (PRS 34). 

Pepper Money said its PRS program was comprised of a mix of non-conforming and prime mortgages.

“Since 2003, we have completed 54 securitisation transactions raising over A$33bn via our four programs: Pepper-Prime, PRS, Pepper-Social and SPARKZ,” Moir said.

Marking the non-bank lender’s third non-conforming PRS deal this year, the transaction will settle on October 13.  

The arranger and joint lead manager was NAB, along with joint lead managers CBA, Macquarie Bank and Westpac.

According to the Australian Financial Review, $28.2 million of residential mortgage bonds have been issued this year, 10% below the same time last year.

NAB data showed $4.2 billion of asset-backed bonds have been issued, around 30% below the $5.7 billion of sales at the same time last year.

Most of the mortgage-backed bonds were sold by non-bank lenders that rely on securitisation as the primary source of funding, the publication said.