Why ADIs getting special treatment from the RBA is helping smaller lenders
Non-bank Firstmac has set a new Australian record, issuing the largest non-bank Australian mortgage bond. The $2 billion deal drew investors that had never before participated in the market, highlighting the pressure on investors to find yield. The record also highlights major banks’ absence from the mortgage-bond market thanks to a COVID-19-related Reserve Bank policy.
Strong demand for the Australian residential mortgage-backed security spurred the Brisbane-based non-bank to double the size of the offering from its initial $1 billion, according to a report by The Australian Financial Review. Appetite for the bond pushed the yield on the issue to the lowest level relative to the one-month bank bill swap rate (a difference referred to as the spread) for any non-bank Australian RMBS issue since the Global Financial Crisis.
The 73-basis-point spread reflected the high demand for yield from fixed-income investors dealing with ultra-low interest rates around the world, according to AFR. Rock-bottom rates have lowered the amounts earned on fixed-income investments.
James Austin, Firstmac’s chief financial officer, said that six of the deal’s 29 backers were investing in non-bank Australian RMBS for the first time – a sign of fixed-income investors’ hunger for yield.
“With all the government intervention and the central bank stimulus injected all around the world, it means some banks are not issuing paper in any form, or it’s very limited,” Austin told AFR. “You have all these investors looking for yield. It’s not just Australia, it’s global.”
Big banks’ absence from the mortgage bond market has also spurred investor demand, increasing the size of recent non-bank deals. Deposit-taking institutions have used the Reserve Bank of Australia’s Term Funding Facility, introduced last year at the height of the COVID-19 pandemic. The TFF allows banks to borrow for three years at the record-low 0.1% cash rate, instead of turning to global capital markets.
The Firstmac issuance pushes the amount raised in Australian RMBS to more than $15 billion so far this year – already half the amount for all of 2020, according to data from Commonwealth Bank. The deal flow highlights a fear of missing out across the debt market, according to Tally Dewan, senior securitisation strategist for CBA.
“FOMO seems to be gripping the securitisation market, with spreads grinding and issuance ramping,” she told AFR.
The Firstmac deal’s record size and low spread were surprising, considering the run of mortgage bonds pricing in the market, Austin told the publication.
“There were six non-bank RMBS deals in the market at the same time,” he said. “I’ve never seen that. Normally that would be a great concern about whether the market could absorb all of these deals at once.”
Last month, non-bank Resimac priced a $1 billion offering, following a $1.5 billion offering in March – its biggest since the GFC. Other RMBS deals have been issued by Pepper, La Trobe Financial and Columbus Capital.
The increase in RMBS issuance comes as the property market continues to skyrocket. Austin said the spike in home buying had allowed Firstmac to issue more mortgages in April than ever before, AFR reported.
“We are seeing pretty strong volumes in what we are writing,” Austin said. “Last month we settled $500 million of home loans, which is a record for us.”