Australian Fixed Income Forum 2010: Aussie securitisation market shows signs of recovery

The Australian securitisation market is looking more positive, but remains a far way off the 2006/2007 heights, according to panellists at the Australian Fixed Income Forum 2010, held by Asia Risk in Sydney today.

"While the securitisation market is looking a lot healthier compared with a year ago, pricing levels have become more economic and the secondary market has reopened to some extent, and the majority of transactions completed to date have relied on substantial Australian Office of Financial Management (AOFM) support," said John Sorrell, head of credit at Tyndall/Suncorp Investment Management in Brisbane.

However, Tony Togher, head of short-term investments at Colonial First State Global Asset Management in Sydney, said the improvement in market conditions was relative. While transactions are being undertaken, the market is unlikely to return to peak levels any time soon: "If we go back to the peak of the market in 2006–2007, about 50% of investors in asset-backed securities were made up of special investment vehicles (SIVs), 20% were banks and 30% was real money. The SIVs are gone and the banks are more reluctant to purchase these securities, which means even assuming real money accounts are still purchasing the same amount, 70% of the money is gone. That is not likely to come back in a hurry," he said.

Togher added: "If prices got to a level where they were well and truly overvalued, this would attract more money, but that simple carry trade of investing through various conduits is no longer there and you have to be realistic."

Among the issues discussed by the panellists was the current debate surrounding the introduction of skin-in-the-game requirements, which force securitisers to hold a set percentage of assets to create an alignment of interest. While in the US, lenders are required to retain at least 5% of the risk of losses on asset-backed securities, panellists preferred a more principles-based approach to skin-in-the-game requirements in Australia.

In particular, they feared forcing securitisers to keep a prescriptive 5% of assets on balance sheet would significantly reduce competition in the Australian market space. "If we start being very prescriptive on skin-in-the-game then all that will do is drive the smaller institutions out of the market because they just don't have the access to capital," said Bruce Potts, investment director of debt investments at Industry Funds Management in Melbourne.