Australia sets template for covered bonds

Thu Nov 29, 2012 9:56pm EST

* One year balance shows success of security
    * Australian banks issued almost AUD41bn
    * Results encourage other Asian countries

    By John Weavers
    Nov 30 (IFR) - A year on from its first covered bonds,
Australia's experience is providing an encouraging template for
other Asian jurisdictions to follow. 
    Australia's covered bond market has gone from strength to
strength since November 2011, and the country's four major banks
have become significant players in the senior secured universe
at home and abroad.
    The pace of progress will not have gone unnoticed elsewhere
in Asia Pacific, with regulators moving closer to creating
legislation that will allow the issuance of covered bonds in
Singapore and South Korea.
    There has been the odd hiccup along the way. ANZ and Westpac
ruffled a few feathers with the first deals, when they pushed
through a combined USD2.25bn of inaugural covered bonds to
underwhelmed US-dollar investors. NAB's 14-year sterling print
in August was also poorly received, but, generally, the four
majors have timed their market visits well to take advantage of
a highly receptive global audience.
    So far ANZ, CBA, NAB and Westpac have taken in around
AUD38.5bn equivalent in covered bond format over the last 12
months.
    Just over AUD10bn has been raised in local currency, almost
AUD11bn equivalent in euros and approximately AUD11.6bn in US
dollars alongside smaller transactions in sterling, Swiss francs
and Norwegian kroner.
    In addition, non-major Suncorp has raised AUD2.2bn from two
domestic issues.
    The majors have raised almost as much in the covered-bond
format than they have from their traditional senior unsecured
funding sources where they have issued AUD11.65bn domestically
and around AUD30bn equivalent overseas in 2012.
    Adam Gaydon, ABS syndicate manager at ANZ, said: "Overall,
things have gone very well at home and abroad with Australia's
major banks able to tap Europe's deep and liquid market and the
USA's growing covered bond market."
    Over the last 12 months as investors became more risk averse
they were increasingly attracted to this well-regarded Triple A
rated asset class, a highly regarded AAA jurisdiction and
Australia's well-regarded (Double A rated) major banks.
"Australian covered bonds ticked almost every box plus offered
investors diversification benefits as a new asset class," Gaydon
said.
    On the sell side, the majors have been able to diversify
their investor bases and enjoy decent savings over the senior
unsecured market.
    These savings amount to around 50bp for new
Australian-dollar five-year paper as the NAB senior unsecured
February 2017s are being offered at 95bp over swaps, whereas
Westpac's February 2017 covered bonds were offered at 52bp.
    SECURITISATION LIVES ON
    Importantly, fears over the future of RMBS have not been
realised. These fears reached a peak in January when CBA and
Westpac made their debuts in the Aussie-dollar covered bond
arena when they paid 175bp and 165bp respectively.over BBSW for
five-year paper, levels that did not make it economical for
anyone to issue RMBS.
    This caused a pause in the RMBS market before ING Bank
issued Class A1 notes with 3.2 year weighted-average life at
145bp over BBSW on March 29.
    The global backdrop deteriorated subsequently, pushing
spreads wider, before recovering again later in the year before
as ING returned on September 27 when it paid 135bp over BBSW for
its Class A1 notes with a 2.7 year WAL.
    One consequence of the new covered bond market is the
dramatic downturn in major bank RMBS issuance. There has been
only one deal each from CBA and Westpac this year. Their
restricted presence has certainly buttressed non-major ADI
deals.
    Indeed, the strength and breadth of demand for RMBS paper in
recent months has been such that no support was required from
the Australian Office of Financial Management in four of the
last five transactions.
    Only once previously - Members Equity in March 2011 - has
the AOFM's involvement not been necessary since it began
investing in RMBS in late 2008.
    As far as lessons for other jurisdictions are concerned
Gaydon said: "A key strength of the Australian model is its
simple, straight forward legislation, as well the major banks'
willingness to work together to achieve almost identical
structures besides minor differences in their respective
collateral pools."
    Gaydon also stressed the importance of releasing monthly
updates on the performances of the bank's mortgage portfolios,
which are publically available on their websites.
He contrasted the high level of transparency here with a lot of
older European issuers where updates were quarterly and less
detailed than the Australian model.
    Total Australian covered bond issuance since Nov. 2011   
 Principal       Total
 Currency        
 Australian      12,300,000,000
 dollar          
 Euro            10,994,708,250
 Pound sterling  2,337,265,000 
 Norwegian       1,964,962,500 
 kroner          
 Swiss franc     1,660,350,000 
 US dollar       11,605,900,000
 Total           40,863,185,750