ASJ Issue 14 (June 2018) by Australian Securitisation Forum ASJ

Securitising the green house Incorporating Australian Securitisation & Covered Bonds >> Issue 14 â&#x20AC;˘ 2018

Australia makes its first steps in the green RMBS sector

mbarry@latrobefinancial.com.au

rharkness@latrobefinancial.com.au

candrews@latrobefinancial.com.au

ASJ AUSTRALIAN SECURITISATION JOURNAL

Incorporating Australian Securitisation & Covered Bonds

>> Issue 14 • 2018

ASF MANAGEMENT COMMITTEE Chairman Chris Green Deputy Chairpersons Sarah Hofman David Ziegler Treasurer Heather Baister Chief Executive Officer Chris Dalton asf@securitisation.com.au +61 2 8243 3900 www.securitisation.com.au ASJ PUBLISHED BY

www.kanganews.com +61 2 8256 5555 Chief Executive Samantha Swiss sswiss@kanganews.com Managing Editor Laurence Davison ldavison@kanganews.com Deputy Editor Helen Craig hcraig@kanganews.com Associate Staff Writer Matthew Zaunmayr mzaunmayr@kanganews.com Business Development Manager Jeremy Masters jmasters@kanganews.com Sales Support Officer Jessica Callander jcallander@kanganews.com Design Consultants Hobra Design www.hobradesign.com ISSN 1839-9886 (print) ISSN 2207-9025 (online) Printed in Australia by Spotpress.

CONTENTS OF THIS MAGAZINE IN ANY FORM IS PROHIBITED WITHOUT THE PRIOR CONSENT OF THE COPYRIGHT HOLDER.

CONTENTS

2 ASF WELCOME 4 COLUMN 6 EVENT REPORT 8 FEATURE 10 Q&A 12 FEATURE 18 ROUNDTABLE 28 TRUSTEE PROFILES 34 ISSUER PROFILES

Chris Dalton, chief executive, Australian Securitisation Forum

Belinda Smith, chair of the Australian Securitisation Forum’s Women in Securitisation subcommittee, shares industry insights and initiatives for 2018. Global market participants share views on international demand for Australian assets, from the 2017 Australian Securitisation Forum annual conference.

The first half of 2018 was notable for some offshore successes for Australian securitisers. ASJ profiles three key deals and their different approaches to global distribution.

Resimac has bold ambitions for business growth having completed its merger with Homeloans. The company explains the role of organic and inorganic growth, and the importance of systems integration and funding markets. Private-equity firms have made their presence felt in the Australian nonbank sector. ASJ talks to interested parties about the purpose and value of the inbound investment. National Australia Bank gathered market participants to discuss the present and future of green mortgage-backed supply – having issued the first Australian deal in February.

34 AMP Bank ANZ Banking Group Australian Finance Group 35 Auswide Bank Bank of Queensland Bluestone Group 36 Citi Columbus Capital Commonwealth Bank of Australia 37 Credit Union Australia Firstmac FlexiGroup 38 Heritage Bank IMB Bank ING Bank (Australia)

46 SURVEY

Australian Executor Trustees, Equity Trustees and Eticore share outlooks on their sector and key company information.

39 Latitude Financial Services La Trobe Financial Liberty Financial 40 Macquarie Group ME 41 Motor Trade Finance MyState Bank National Australia Bank 42 People’s Choice Credit Union Pepper Group P&N Bank 43 RedZed Lending Solutions Resimac Suncorp 44 ThinkTank Group Westpac Banking Corporation

Key takeouts from the Australian Securitisation Forum’s quantitative and qualitative survey of Australian investors, published in April.

FOREWORD

FROM THE CHIEF EXECUTIVE

elcome to the first edition of the Australian Securitisation Journal (ASJ) for 2018. After a post-crisis record for primary-market issuance in 2017, the new year has witnessed a steady stream of new securitisation issues. Issuance in the first quarter of 2018 was lower than that of 2017, partly reflecting increased volatility in global financial markets and slower credit growth in Australia. Towards the mid-point of 2018, issuance has come from a cross-section of the market including major, regional and customer-owned-mutual banks, and the nonbank sector. Demand for new residential mortgage-backed securities (RMBS) and other asset-backed securities (ABS) continues to be strong reflecting an increasing presence of global investors in the bidding for allocations of new issues. Continuing from 2017, a pattern of oversubscription for new issues is a feature of the Australian market. The outlook for the Australian securitisation market looks promising with many financiers now seeing regular issuance of RMBS and ABS as a key part of their funding programmes. The securitisation of credit-card and consumer-loan receivables by Latitude Finance Australia has added much sought-after diversification, and continuing issuance from Volkswagen Financial Services Australia’s Driver Australia programme has seen auto ABS continue as a significant part of the ABS sector. The incorporation of a green tranche in National Australia Bank’s first RMBS issue of 2018 has been another innovation in the market. There is an expectation that green RMBS and ABS will become an established feature of the market. The revised prudential standard for securitisation by regulated financial institutions, APS 120, came into effect on 1 January. A primary impact of the revised standard has been the restructuring of warehouse facilities provided by Australian Prudential Regulation Authority (APRA)-regulated banks to smaller financial institutions and nonbank financial institutions. The standard requires a higher regulatory capital charge for any bank exposure to nonsenior tranches of a securitisation, including warehouse facilities. This means banks will fund the senior tranche of a warehouse facility, with the mezzanine and junior tranches being funded either by specialist credit managers or the originator of the assets themselves. Overall, the market appears to have adjusted quite well to this change, albeit after considerable time and cost for warehouse lenders and their clients in the latter part of 2017. As a result of a directive from the Commonwealth government, the role of APRA in the nonbank segment of the financial system has been formalised. While the role is deliberately limited, it includes the periodic reporting by nonbanks of their lending volumes and the granting of reserve powers to the prudential regulator to issue rules to nonbank lenders in extraordinary circumstances where nonbank lending is deemed to pose systemic risk to Australia’s financial system. The Australian Securitisation Forum is pleased to see its membership grow to more than 115 corporate members comprising the vast majority of active participants in Australia and New Zealand’s securitisation market. Pleasingly, the New Zealand contingent of our membership continues to gain momentum with member education and networking events, as well as leading an industry response to the Reserve Bank of New Zealand’s proposal to establish a new standardised mortgage-collateral standard for its liquiditymanagement purposes. While it is some way off, we are in advanced stages of organising the annual Australian Securitisation conference which will be held at the Sydney Hilton on 26 and 27 November 2018. I hope you enjoy this edition of the ASJ, and that 2018 is another successful year for our market.

CHRIS DALTON

CEO, AUSTRALIAN SECURITISATION FORUM 2 · Australian Securitisation Journal | Issue 14_2018

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COLUMN

BELINDA SMITH

CHAIR, WOMEN IN SECURITISATION SUBCOMMITTEE, AUSTRALIAN SECURITISATION FORUM

s incoming chair, I would like to thank Mary Ploughman for her passion in championing women in the industry, and her tenacity and drive in establishing and chairing WIS. Our model has been so successful that it has been followed by our American securitisation industry colleagues. WIS is constantly looking at fresh ways to develop a richer and more varied range of initiatives and ideas to achieve its objectives. To this end, a number of new members have joined the WIS subcommittee in 2018. Also, to better engage all members of our industry, the subcommittee will now include a minimum of two men. The WIS subcommittee recently met to set its strategic priorities for 2018. These priorities align with the key objectives of WIS. These are to provide women in the securitisation industry with support and high-quality networking and career-development opportunities, to raise awareness of issues that affect women’s professional advancement, and to encourage strong and ongoing engagement in the industry from different levels of seniority.

WIS BY NUMBERS To help WIS target its initiatives and ideas it is important to understand the level of participation and engagement from women in the Australian securitisation industry. 4 · Australian Securitisation Journal | Issue 14_2018

FURTHER ENGAGEMENT With this snapshot of the industry in mind, we looked more deeply at leadership and engagement through the ASF’s industry interaction. ASF 2 0 1 7 CON F EREN CE, AUSTRAL IAN AN D N E W ZEAL AN D REGISTRATION S BY IN DUSTRY SECTOR Female

Male

Female proportion (RHS)

Industry average % female (RHS)

250

45 40

200 150

35 30

134 160

130

100

10 52

0 PROFESSIONAL SERVICES

ISSUER

INTERMEDIARY

21 24

INVESTOR

GOVERNMENT/ OTHER

S O U R C E : A U S T R A LIA N S E C U R IT IS A T IO N FO R U M , K A N G A N E W S M A Y 2 0 1 8

5 0

PROPORTION OF REGISTRATIONS (PER CENT)

In recent years the Australian Securitisation Forum (ASF)’s Women in Securitisation (WIS) subcommittee has made massive progress towards its objectives thanks to the drive of numerous individuals and the support of event sponsors.

NUMBER OF REGISTRATIONS

WIS: A WIDER SPHERE OF INFLUENCE

WIS compiled some informative statistics from available sources to produce “WIS by numbers”. We plan to track these key areas over time as a way to measure the impact of WIS. While such statistics have their limitations, they nonetheless provide a good indication of the participation and engagement of women in three key areas. Registration for the 2017 ASF conference represents a cross-section of the securitisation industry, with more than 700 Australian- and New Zealand-based delegates registered for the November 2017 event. Based upon data in the delegate registration forms, we have calculated gender statistics in five key industry sectors – professional services, issuers, intermediaries, investors, and government and other (see chart). Overall, females comprised 30 per cent of registered delegates. Female representation was highest from the professional-services sector, at 38 per cent. The issuer and investor sectors had below-average female representation at 25 per cent and 21 per cent respectively. The 2017 ASF conference agenda comprised industry leaders and guest speakers, with 21 per cent of panellists being female – 16 per cent excluding the WIS panel. This is lower than the ratio of female registered delegates. WIS plans to work with the ASF, its conference organiser, KangaNews, and conference sponsors to target increased participation from female leaders in 2018, including the establishment of a female public speaking and media register. ASF members will be encouraged to register female speakers from their organisations to participate.

WIS diversity views MACQUARIE BANK’S DAVID ZIEGLER AND CLEAN ENERGY FINANCE CORPORATION’S RICHARD LOVELL HAVE JOINED THE WOMEN IN SECURITISATION (WIS) SUBCOMMITTEE TO ADD DIVERSITY TO ITS PERSPECTIVE. ZIEGLER AND LOVELL SHARE THEIR REASONS FOR GETTING INVOLVED. ZIEGLER I believe insight, determination,

patience and collaboration are the traits that underpin a rewarding securitisation career, and I’ve observed these traits in many of the successful women I’ve worked with over my career. I am also driven by a deep sense of fairness and equity which, to use the corporate vernacular, are encapsulated by the phrase ‘diversity and inclusion’ (D&I). I have become a more vocal advocate for D&I as I believe these

principles make the workplace better for everyone. WIS gives me greater insight into the challenges faced by women in the securitisation industry, which in turn helps direct my D&I advocacy. LOVELL Over the course of my career in securitisation so far I have been tremendously lucky to work for and with a number of enormously talented women. I have also seen a number of instances where corporate cultures

have frustrated women in achieving their potential, while at the same time being bad for the business. I thought that joining the WIS subcommittee would be a great opportunity to contribute to the effort to minimise these kinds of occurrences in the securitisation industry. It would be great to see the industry being a leader in issues of equity and diversity, as part of a wider financial sector which has some way to go in this area.

Women are represented in leadership roles across and growth mindset into their personal and professional the ASF. There is 33 per cent female representation on lives. the ASF National Committee and the same proportion WIS will also be working closely with the ASF National of ASF subcommittee chairs are women – noting that Committee to encourage, and remove any inhibitors to, National Committee members are required to chair greater participation by women in industry leadership ASF subcommittees. Meanwhile, 41 per cent of ASF through ASF involvement and the annual conference. subcommittee members are female. To this end, the ASF National Committee recently ASF leadership representation appears to be broadly adopted a new diversity and inclusion charter as part of in line with overall industry participation, at roughly a its governance framework to ensure a consistent policy third. WIS will work with the ASF National Committee to operates across ASF committees and activities. encourage female participation and ensure a pipeline of Elsewhere, WIS will leverage ASF relationships female leaders are emerging with other like-minded from subcommittee organisations including “Women are represented in leadership participation. Women in Banking and roles across the ASF. There is 33 per WIS also has a number Finance and Women in cent female representation on the ASF of initiatives and ideas for Economics. National Committee and the same 2018. Past WIS networking Another goal for 2018 is proportion of ASF subcommittee chairs are events have been very better to engage with men in women. Meanwhile, 41 per cent of ASF well attended and we the industry to assist WIS to subcommittee members are female.” aim to repeat this success meet its objectives. We are with events in 2018. Our delighted that David Ziegler signature event will again from Macquarie Bank and be held at the Establishment in Sydney in the third Richard Lovell from Clean Energy Finance Corporation, quarter. We have also committed to hold WIS events in have joined the WIS subcommittee. I asked David and Melbourne and Brisbane. Richard to share their reasons for joining WIS and where In addition, we plan to encourage and organise an they hope to contribute to WIS objectives (see box on array of more informal events, along the lines of walkthis page). and-talk lunchtime sessions, art exhibitions and film I look forward to implementing these initiatives and screenings. Also, following great feedback from previous ideas in 2018. If you would like to get involved or have attendees, we will arrange a Melbourne-based resilience other ideas or areas of need that you feel are not being programme, targeted at women at all levels in the met, please contact Lynsey Jackson at the ASF or me. I securitisation industry looking to incorporate a strength look forward to seeing you at WIS events during the year. ■ 5

EVENT REPORT

GLOBAL OPPORTUNITIES Engagement with international investors has been a major theme of the Australian securitisation market in recent years, with lack of supply internationally giving Australian issuers the opportunity to grow their funding base. A group of international market participants gathered at the Australian Securitisation Forum’s annual conference in November last year to share perspectives on the opportunity set and outlook for global investor outreach. FABRICE GUESDE NATIXIS

“The big issue in Europe is availability of assets – there is virtually nothing available for investors to buy. There are really only two active RMBS markets – the Netherlands and the UK – and spreads have come down in these because investors have no alternative option.” “The question we are asking is about the size of the Australian market, specifically its capacity to absorb ever-growing volume of securitisation. A key driver of growth potential will inevitably be the ability of local issuers to expand their distribution profile internationally.” STAFFORD BUTT WELLS FARGO

“I think it’s fairly evident to European investors that Australian product has been offering solid relative value in 2017. Lack of supply from other jurisdictions is one factor here. But, more importantly, if you rebase global spreads to a single currency the only things that offer a better spread than Australian paper are US CLOs and, maybe, US nonagency jumbos. Those asset classes both come with very specific, intrinsic risks.” “A fundamental change in 2018 is the end of the UK’s term-funding scheme in February. This has given banks cheap four-year money, and its removal will mean increased issuance in the sterling market in particular. There are also some big refinancing walls coming as that funding matures: £30-40 billion in each of 2019 and 2020, jumping to £60 billion in 2021 – assuming no early refinancing.” 6 · Australian Securitisation Journal | Issue 14_2018

HAAN TI MUFG SECURITIES

“Offshore investors look at arrears performance and hear stories about valuations and property bubbles, and can’t marry the two. Australian issuers have done a great job in educating the international investor market. The more this continues the better investors will understand.” “Investors have raised the issue of Australian property valuation, and the consensus is that it is close to the peak. This hasn’t been a problem for RMBS investment in 2017 as the product has seasoning of 12 months or so. In 2018-19, we will start to see collateral from the most recent vintages in which valuations are quite hard. It will be interesting to see how investors respond, though asset performance should continue to be strong.” MARJAN VAN DER WEIJDEN FITCH RATINGS

“When central banks are no longer providing as much cheap funding and regulation starts to bed down this should provide the European market with more issuance and liquidity. But this is not likely to be a turnaround in the short term, as far as we’re concerned.” “Asia-Pacific issuance from 2009-17 looks small on a global scale at an expected US$70 billion for 2017, but it has increased and has the potential to grow further. Perhaps more importantly is the context of other global issuance. Of the US$190 billion of European issuance in 2017, around 50 per cent was retained by bank issuers as collateral for central banks. This stacks up quite well with APAC issuance in the sense of securities actually placed with investors.”

FEATURE

GLOBAL ENGAGEMENT

FIRSTMAC’S NEW APPROACH

The traditional route to US dollar issuance taken by Australian securitisers has been the 144A format targeted at US domestic investors – as deployed by Pepper. This was the method Firstmac Australian-origin residential mortgageused when it last issued US dollars – in 2014 – confirms James backed securities (RMBS) deal flow in the Austin, the firm’s Brisbane-based chief financial officer. But it found the legal and due-diligence costs of 144A issuance made first half of 2018 demonstrated the desire the format uneconomic and therefore refocused its offshore of local nonbank issuers to develop their investor-relations work on Asia and Europe. international investor bases. Firstmac, The new deal was in Reg S format, and Austin reveals Pepper and Liberty Financial (Liberty) took that Firstmac had an explicit goal of increasing its funding different approaches and were rewarded diversification by finding new investors. In the end it added six with a positive response from a variety of new accounts to its register via its latest RMBS. Distribution was weighted towards international investors investor groups. according to issuer data: 42 per cent of the transaction was placed in Europe, 28 per cent in Asia and a further 6 per cent BY LAURENCE DAVISON AND MATT ZAUNMAYR elsewhere outside Australia. National Australia Bank (NAB) and United Overseas Bank (UOB) arranged and led. European participation was assisted by the fact that this is irstmac’s return to the residential mortgage-backed the first time Firstmac has issued a transaction in compliance securities (RMBS) market took a new approach to with Europe’s risk-retention requirements, CRD IV. The US dollar issuance. This – together with the issuer’s retained tranches comprise the 5 per cent of pool risk required longstanding engagement with international investors to meet this regulation. and a Europe-friendly deal structure – allowed it to Austin says Firstmac’s approach to CRD IV is unusual. find brand-new investors and a majority-offshore distribution “Issuers can retain a vertical or a horizontal slice of the trade profile. to achieve the 5 per cent minimum, and my understanding is Firstmac Mortgage Funding Trust No.4 Series 1-2018 had that most have elected to take the vertical approach,” he says. equivalent aggregate volume of A$600 million (US$450.2 “However, we decided to retain the bottom 5 per cent of the million) across nine tranches – of which the bottom five, structure in a horizontal slice, which worked very well for us. It totalling A$30 million, were retained by the issuer. The primecertainly allowed a number of European and UK accounts that loan deal included a US$180 million tranche. have not participated before to be involved in the deal.” Pepper Residential Securities Trust No.20 (PRS 20) priced on Firstmac is especially encouraged by the new demand 21 March with an upsize to A$1 billion equivalent from A$700 it found in Asia. The issuer wanted to achieve maximum million at launch. The nonconforming RMBS transaction has penetration into the Asian investor base, and Austin says it 10 tranches including the US$150 million A1-u1 notes which added UOB as a lead manager to help it engage with “true feature a one-year, hard-bullet maturity. Asian money” as opposed to “regional outposts” of European The use of 144A documentation allowed Pepper to market funds – even though the local investor base is relatively less the securities into the US, and participation from US-based familiar with structured credit. investors was an important component of the deal according to Austin adds that there was a lot more investor work the issuer. required on Firstmac’s latest transaction than a standard Meanwhile, Liberty Series 2018-1 (Liberty 2018-1) priced on RMBS, including a number of trips to South East Asia and a 27 April, netting A$1.5 billion equivalent including a €83.4 preparation period that stretched back over 12 months. million (US$100.7 million) note. The nonconforming deal In return for its commitment, Austin says Firstmac is launched at A$700 million. confident it has found a new source of liquidity that it should be able to tap on a reasonably consistent basis. He suggests “My sense is that the distinction between ADI annual Reg S transactions should be possible, market conditions and non-ADI issuers is greater in Australia permitting. In fact, in one respect than it is offshore – we don’t experience the Firstmac may have received a same barriers to entry internationally.” more favourable hearing from JAMES AUSTIN FIRSTMAC investors than it does in the domestic market.

8 · Australian Securitisation Journal | Issue 14_2018

“My sense is that the distinction between authorised deposit-taking institution [ADI] and non-ADI issuers is greater in Australia than it is offshore – we don’t experience the same barriers to entry internationally,” Austin explains. “Offshore investors tend to look at credit quality alone, and there can’t be many issuers – ADI or not – with a better quality book to offer than ours.”

144A WORKS FOR PEPPER

“We have spent a lot of time and effort cultivating a US dollar investor base. It has become very reliable and we want to continue feeding it.” MATTHEW O’HARE PEPPER

end yield began rising during the transaction process. However, by this stage the issuer was well progressed with investor engagement and had strong indications of interest.

Pepper found demand for its latest RMBS in the US. According to data provided by NAB – which arranged and acted as lead manager alongside Commonwealth Bank of Australia LIBERTY RETURNS TO EUROPE (CommBank) and Westpac Institutional Bank (Westpac) – Liberty has substantially scaled up the size of its RMBS nearly 70 per cent of the US dollar notes was placed with transactions since the beginning of 2017. Its most recent deal international investors while nearly a third of the Australian – which had CommBank as arranger and Bank of America dollar portion of the deal was sold offshore. Merrill Lynch, Deutsche Bank, NAB and Westpac as additional NAB says investors came from Australia, Asia, the US and leads – breaks the record set by Liberty Series 2017-3 (Liberty the UK. A total of 27 accounts participated across the structure, 2017-3) and Liberty Series 2017-4 (Liberty 2017-4) for total 15 of them offshore. volume in an Australian nonconforming RMBS deal. Including US dollars in nonconforming deals issued from Peter Riedel, chief financial officer at Liberty in Melbourne, the PRS programme is now par for the course for Pepper. It says: “We are always hopeful of upsizing but we don’t take it included hard-bullet US dollar notes in PRS 12, 14, 16, 19 and for granted. To upsize this transaction to the extent we did now 20, while PRS 17 and 18 had scheduled-amortisation US exceeded our expectations.” dollar notes. Riedel attributes the upsize to Liberty’s ability to Matthew O’Hare, Pepper’s Sydney-based Australian engage new investors – 41 of which participated in the new treasurer, says: “We have spent a lot of time and effort transaction, 10 of which were new to Liberty. “The new demand cultivating a US dollar investor base. It has become very reliable is coming largely from offshore. We’ve made three trips to and we want to continue feeding it. We had four full-tranche Europe in the last 12 months to meet investors and speak about bids for the US dollar notes in PRS 19 in October last year so we the Australian mortgage market and Liberty specifically. In had every confidence of a good reception this time around.” our experience, the more often you engage investors the more Being in regular contact with US investors, including knowledgeable and confident they will become, and therefore through the strategy of regularly issuing relatively shortthe more likely they are to invest,” Riedel says. tenor, bullet notes, has helped build demand for Pepper RMBS Deal statistics provided by CommBank reveal that over time. When the hard bullet matures, Pepper expects to offshore investors accounted for 46 per cent of the allocation. refinance via a second, one-year maturity note. Real-money accounts were dominant in the distribution by While Pepper did not conduct a deal roadshow in Asia or investor type, being allocated 75 per cent. Banks accounted Europe on this occasion, O’Hare says the issuer has updated for the remainder. investors in both regions recently and encountered strong Riedel adds: “We seek to allocate investors in the euro notes interest in PRS 20 from Asia and a notable uptick from Europe fully so it is really about what the demand is for that security at as well. The transaction brought four new accounts to Pepper’s a particular point in time. There was a higher level of demand books, three of them from offshore. this time around than there was in Series 2017-4, as well as Market conditions have been choppier so far in 2018 than some new investors in the euro tranche.” ■ last year. But O’Hare says PRS 20 was well under way before “The new demand is coming largely from offshore. In the latest round of our experience, the more often you engage investors the volatility emerged. more knowledgeable and confident they will become The issuer saw some movement in the bank- and therefore the more likely they are to invest.” PETER RIEDEL LIBERTY FINANCIAL bill swap rate ahead of the deal and US front9

COPUBLISHED

Q+A

RESIMAC TARGETS DOUBLE MARKET SHARE In late 2016, Resimac underwent a significant organisational transformation when it merged with the listed mortgage specialist, Homeloans. The combined entity now has the most prominent nonbank footprint in the Australian mortgage-distribution space with a portfolio exceeding A$13 billion (US$9.8 billion) and a funding platform of A$8 billion. Two of the company’s Sydney-based executives – Mary Ploughman, joint chief executive, and Andrew Marsden, general manager, treasury and securitisation – discuss current positioning and future strategy.

hat was the thinking behind the merger and how is the combined business structured today? ◆ PLOUGHMAN Resimac has been quite successful in developing its front-end distribution business into diversified channels such as online, the broker aggregation market and direct to consumer. However, it lacked a genuine retail presence. Homeloans, on the other hand, had built a very successful brand largely based on the mortgage-manager model with longstanding funding support and investment from National Australia Bank and Macquarie Bank. The respective strengths of the two organisations were definitely complementary, so the merger made a lot of sense and was overwhelmingly supported by both group’s boards and shareholders. The combined business now has a true vertically integrated model through the combination of a highly regarded funding platform and a fully diversified retail mortgage-distribution programme. How has Resimac’s market share and book growth changed? ◆ PLOUGHMAN The growth in our nonconforming market share is particularly noteworthy given the benign economic conditions and the strong housing market that largely determine the overall size of the space. We are now one of the largest originators in the sector. Pleasingly, the growth in new business has been

10 · Australian Securitisation Journal | Issue 14_2018

achieved without having to sacrifice credit quality or price. We’re principally in the business to grow organically but, where market conditions allow, we have no issues augmenting growth with acquisitions aligned with enterprise strategy. ◆ MARSDEN We have had some success in pursuing acquisitions by regulating our M&A activities in line with our risk appetite and funding capabilities. We have closed in excess of A$2 billion in asset and company acquisitions over the last three years in the domestic, New Zealand and UK markets. All this new loan volume has been integrated into our servicing and funding platforms in a very timely manner. Investors have responded very favourably, as we’ve expanded our issuance programmes and given them more to look at. Last year we were able to securitise acquired assets in Australia, New Zealand and the UK. How have the structural changes in the mortgage market been reflected in Resimac’s funding programme? ◆ MARSDEN We made a significant decision some time ago that we needed to diversify our funding base, starting with our short-term warehouse lines. Over the last five years we have expanded the markets in which we issue and now have a successful US 144A programme that makes a material contribution to our funding task. We’ve always ensured that we maintain excess capacity in our asset and liability platforms to take advantage

of opportunities and to accommodate growth in the business. Our investment in the offshore funding programme underpins a lot of our enterprise decisions, such as our abilities to meet calls and our risk appetite. We were able to raise A$3.75 billion in our residential mortgagebacked securities (RMBS) programmes in 2017, which we see as a clear recognition of the programme. How does the organisation align its enterprise objectives with those of RMBS investors? ◆ PLOUGHMAN First up, the performance of the asset collateral is outstanding: Australian mortgages have outperformed issuance peers for a number of years now. To me, it would be one of the safest forms of collateral and, therefore, a low-risk investment. The attractiveness of Australian product is augmented by its yield profile, particularly in the triple-A space. This doesn’t mean to say investors won’t be cautious, but their caution will play to our strengths as I believe we understand investor needs better than our competitors. We maintain a regular profile in issuance markets. The frequency of our capital-markets issuance enables awareness of perceived risks, allowing us to respond in the manner in which the organisation is managed. Can you share a perspective on the strengths of Resimac’s securitisation issuance programme?

◆ MARSDEN We are a consistent

issuer with capital structures tailored to investor preferences. Our mortgage collateral outperforms peers, we have an exceptional record of meeting call options and we have undertaken measures to maintain ratings where criteria have changed. We work closely with the buy side to understand sensitivities and needs, and have been able to build a strong foundation of real-money investors. Our investor base encompasses global asset managers to boutique credit funds and family offices, and this diversity has been reflected in our RMBS trades and private funding structures. ◆ PLOUGHMAN A primary objective of our investor-relations activities is not only to attract new investors but to foster relationships – so investors are comfortable with our name and are long-term partners. We come at our

issue in varying conditions. We have closed 22 public RMBS deals since the onset of the financial crisis and have undertaken a number of successful capital-raising trades in line with our balance-sheet growth. How has asset performance been over the last five years? ◆ PLOUGHMAN We have seen our book’s performance improve significantly to reflect tighter underwriting standards introduced during the early days of the crisis. There has also been significant consolidation in distribution channels aided by a national regulatory and licensing regime that has resulted in a higher standard of mortgage-industry participants. We have also created a stronger model by vertically integrating our origination sources, giving Resimac greater control and enhanced asset quality.

in the platform to ensure it meets the requirements of both the asset and liability sides of the organisation. The primary objective with our systems is for them to be as flexible and scaleable as possible, to support growth aligned to strategy while offering efficiency and productivity outcomes, and comprehensive managementinformation system reporting. ◆ MARSDEN Owning our own platform has enabled us to respond to opportunities in the market and product development with an element of control and governance we would not have if using third-party providers. How do you see the organisation positioning itself over the next five years? ◆ PLOUGHMAN Our ambition is to double our market share. To do this, we will focus on our core prime and

“We have seen our book’s performance improve significantly to reflect tighter underwriting standards introduced during the early days of the crisis. There has also been significant consolidation in distribution channels that has resulted in a higher standard of mortgage-industry participants.” MARY PLOUGHMAN

business from the perspective of the investor being the ultimate client that we wish to service – in conjunction with the mum-and-dad borrowers at the front-end. How does Resimac determine the frequency with which it goes to market? ◆ PLOUGHMAN It’s part of our overall funding strategy that covers production volume and refinancing called collateral. We are aware that credit markets can be dysfunctional at times, so the structure of our short-end funding reflects this with excess capacity available at all times. We want to be in the market on a very regular basis and we can demonstrate that we have been able to

Resimac now owns an aggregation platform – with in excess of A$22 billion in loans – and an online channel, both of which have translated into a betterperforming, more diversified book. ◆ MARSDEN It’s also given Resimac greater control over its revenue as we no longer have to pay remuneration to third parties. Our ability to leverage off our technology capabilities has been a real enabler of establishing and building these proprietary channels. How has Resimac’s investment in technology and systems benefited its growth aspirations? ◆ PLOUGHMAN Our proprietary asset-management platform is a core attribute. We have continued to make significant capital investment

nonconforming businesses. We continue to believe the nonconforming market has a very bright future for us and will provide incremental returns to the prime business. We will look at diversifying our asset class on both a selective and opportunistic basis. The directional thrust of the business will always be around converting financial receivables into bonds. The board continues to direct the management team to pursue a mix of organic and inorganic growth within the prescribed risk-return parameters. We have very strict protocols for assessing acquisition opportunities, and these include the requirement that acquired assets be integrated into our servicing and funding platforms. ■ 11

FEATURE

PRIVATE-EQUITY INJECTIONS REV UP AUSTRALIAN NONBANK SECTOR A triumvirate of private-equity firm transactions in the Australian nonbank sector occurred between August 2017 and February 2018. The deals reflect the potential for growth in the space and the businesses that populate it, according to the chief executives of the nonbanks involved. BY MATT ZAUNMAYR

he influx began in July 2017 when Kohlberg Kravis Roberts & Co (KKR) submitted a A$650 million (US$491.9 million) bid for Pepper Group (Pepper) (see box on p14). The offer was accepted in August 2017, resulting in KKR taking a 57 per cent share in the business according to Pepper’s Sydney-based chief executive, Australia, Mario Rehayem. “KKR saw an opportunity where the market price for Pepper wasn’t reflective of the true value of the company, and took that chance to partner with Pepper,” says Rehayem. Blackstone Group (Blackstone) – the largest alternativeinvestment company in the world – then acquired an 80 per cent stake in La Trobe Financial in December 2017. Greg O’Neill, president and chief executive of La Trobe Financial in Melbourne, tells ASJ that after 65 years under a single shareholder model and given the sector’s growth potential,

12 · Australian Securitisation Journal | Issue 14_2018

it was the right time to broaden the company’s shareholder base. Late in February this year, Cerberus Capital (Cerberus) acquired Bluestone Group (Bluestone)’s Australian business. Bluestone’s Sydney-based Asia Pacific chief executive, Campbell Smyth, says this gave Bluestone’s UK parent the opportunity to buy out one of its own major shareholders, Lloyds Development Capital. “This was part of the catalyst as to why the transaction made sense,” says Smyth. “It was not just the fact that there was a bid – having an opportunistic use for the funds on the other side was important.”

GROWTH DRIVER Perhaps the key message coming from the three nonbanks that have enjoyed new investment into their businesses is that the interest is in business-wide growth rather than cherry-picking profitable areas. All three nonbank chief executives say the primary role of the private-equity firms will be to facilitate the acceleration of existing growth plans. Smyth says the scale of the opportunity set the nonbank sector is confronting means private-equity investors want to move quickly – and thus are more interested in acquiring scale than in building an operation. “They want to buy an existing business that will start to deliver returns straight away and offer the potential for further investment and growth.” Cerberus is primarily providing help to Bluestone through capital, Smyth explains. He insists: “There is no desire to run the business even if naturally Cerberus will want some engagement with the company. From my perspective it is the ideal outcome, as we have a partner that shares our goals and is prepared to support us in achieving them.” From La Trobe Financial’s perspective, the investment from Blackstone was purely about acquiring a successful business and driving its future growth. O’Neill tells ASJ: “Blackstone did not have to come in and ‘fix’ the business in any way. It knows the sector and asset class very well, having material investments in similar businesses and assets in Europe and the US. Blackstone has backed the existing La Trobe Financial management team to implement the agreed growth strategy.” This means there will be no changes to La Trobe Financial’s credit-risk appetite nor its asset-servicing policies and procedures, O’Neill continues. “As we grow there will be new opportunities to deliver a wider set of lending and wealth-management products, within our risk appetite, to our customer base. Blackstone is a US$450 billion funds-under-management organisation. This undoubtedly strengthens our business and positions us to take advantage of any emerging growth opportunities we identify as being within our risk appetite.” Similarly, Rehayem says KKR has no involvement in Pepper’s day-to-day operations. “It is a part of our board and is there for advice, but it is happy for us to continue to execute

our existing growth plans,” he confirms. Pepper has been through a transition to private ownership, and Rehayem explains that the motive for delisting is predominantly the same as that which led the firm to go public in the first place: its aspirations for growth, organically and by way of acquisition, require capital of a scale that it felt was best sourced via a new stage of ownership structure. “Partnership with KKR will allow us to grow in the way we want and will accelerate a lot of the plans we had booked in for the next 2-3 years. Our businesses are very capital-intensive so we will leverage off KKR’s networks and capital where we can,” says Rehayem.

OPPORTUNITY SET Australia’s nonbanks are experiencing their best growth period since the financial crisis. A more restrictive regulatory regime for banks has created something of a vacuum in specialist parts of the lending space, leaving the field more or less clear for the more nimble nonbank players. Local nonbanks are quick to point out that this is not necessarily riskier lending, just that which requires more specialist credit understanding or innovative distribution methods. “The Australian mortgage market is now worth nearly A$400 billion in new loan volume annually,” says O’Neill. “With increasing pressure on the banking sector to tighten credit-assessment standards – which may have been less than industrial strength – it is a reasonable proposition for the nonbank sector to continue to grow from its current low base of around 3 per cent of the market.” Nonbanks have traditionally serviced borrowers that fall outside banks’ loan criteria. With regulatory standards regarding bank lending tightening, logic suggests that this pool of borrowers should be on the incline. Smyth agrees that nonbank lenders have, and always have had, an important role to play in facilitating loans for these borrowers. However, he cautions against the assumption that nonbanks will fill any void that traditional lenders leave. “It is not a case of nonbanks seeing the regulator rule out certain types of lending from banks, and then coming in and doing the same type of lending. We are a responsible lender, so where the regulator sees systemic risk generally we do too.” He continues: “There will be some areas where nonbanks will certainly look to step in and start facilitating loans. But,

from our perspective and from what I am seeing in the market, the focus will continue to be only on areas that have value and opportunity without bringing unnecessary systemic risk.” This risk prudence is widely espoused by nonbank lenders, with strong and disciplined existing management structures cited by each of those involved in private-equity transactions as a core reason for investor interest in their business.

COMPANY SPECIFICS The overall opportunity set may be clear, but Rehayem says sector-wide growth has likely not been the primary motivation for each specific private-equity investment in these firms. He says company-specific factors were certainly more relevant in the case of KKR and Pepper. “We are very different, so I don’t think it is appropriate to put all three of the major investments in the same boat,” says Rehayem. “There are different strategies and there have been varied results from the acquisitions. From the outside looking in it may seem as though private-equity firms are coming in thick and fast to invest in the market. However, I don’t believe this is the case. I believe the Australian market is always a good one to invest in – but the interest is business-specific.” A factor identified by Bluestone and La Trobe Financial as evidence of their risk approach – and part of what attracted private equity to their businesses – is the relatively low loanto-value ratio (LVR) of their mortgage books. Bluestone’s book LVR averages 67 per cent while La Trobe Financial’s equivalent figure is 63 per cent. Smyth says: “When we undertake studies around the historic performance of loans, LVR is one of the biggest determinants of loss. The reality is, the less coverage you have the more likely you are to incur a loss on a loan that goes badly. We use this as a tool to protect ourselves and borrowers, which I think Cerberus would have identified.” Blackstone has previously made substantial investment commitments to the Australian commercial real-estate sector. It identified the La Trobe Financial product set as holding substantial market opportunity, with the LVR cap being a key risk mitigator, according to O’Neill. The Australian mortgage, housing and banking sectors are all points of ongoing regulatory, political and media attention. However, O’Neill says when Blackstone was considering its investment in the Australian market it came to the same conclusion as La Trobe Financial.

“There is no desire to run the business even if naturally Cerberus will want some engagement with the company. From my perspective it is the ideal outcome as we have a partner that shares our goals and is prepared to support us in achieving them.” CAMPBELL SMYTH BLUESTONE GROUP

FEATURE

The private-equity perspective KOHLBERG KRAVIS ROBERTS & CO (KKR)’S INVESTMENT IN PEPPER GROUP (PEPPER) WAS A LANDMARK TRANSACTION FOR THE AUSTRALIAN NONBANK SECTOR. STUART BLIESCHKE, DIRECTOR AT KKR IN SYDNEY, TELLS ASJ ABOUT THE RATIONALE FOR THE INVESTMENT.

What factors led to KKR’s interest and eventual investment in the Australian nonbank sector? First, KKR had been examining financial-services opportunities related to Pepper’s core business for a while. Nonbank lenders like Pepper provide capital to parts of the economies in which they operate that are not serviced by traditional banks, enabling capital to be available to people and parts of the economy that would otherwise be underserviced. For example, often the customers of Pepper and other nonbank financial institutions are quality borrowers who own their own businesses, or are part-time or contract workers. Yet they would only be able to obtain financing as ‘full-time employees’. Pepper and others are able to provide a solution for these borrowers. Further, Pepper’s

credit model enables the rehabilitation of borrowers’ credit profile from ‘specialist’ into ‘prime’ over time. Beyond Pepper, KKR has also invested in a number of nonbank financial services companies in Australia, including Latitude Financial Services (Latitude) and Findex. Broadly, we see a significant opportunity better to meet the credit needs of customers in many segments including consumer finance. This creates great potential for challenger brands like Latitude to take market share through the provision of more flexible, nimble and targeted product offerings. Also, tech-enabled growth continues to be a major feature in financial services, with nonbanks leading innovation in the sector as dynamic competitors to the majorbank lenders.

What factors led KKR to settle on Pepper in particular as the target of its latest investment in this sector? Pepper really distinguished itself as a diversified global financial-services company with an excellent track record of growth into innovative products and new markets, while maintaining a strong focus on responsible business practices. What I mean by this is that Pepper ensures compliance with all the National Consumer Credit Protection Act and associated regulations as well as guidance published by other key regulators. It also ensures brokers seek and verify information about the customer’s requirements, objectives and financial situations, and ensures that Pepper staff only approve loans that are not unsuitable for a customer.

“We think there’s an opportunity for nonbank lenders further to strengthen their position as a financial-solutions provider to people and parts of the economy that would otherwise be underserviced.” STUART BLIESCHKE KOHLBERG KRAVIS ROBERTS & CO

“There has been an evolution in investor understanding that the Australian housing market is not a single, homogenous entity. It is a collection of regional and metro housing markets performing to different cycles. We do not anticipate a collapse in Australian house prices, rather a cyclical adjustment as part of the normal cycle. This is supported by strong economic growth, a structural deficit in housing stock and above OECD-average population growth,” says O’Neill. On issues in the housing and mortgage market such as Australia’s high household-debt ratio, Smyth says the best thing Bluestone can do to avoid risk is concentrate on its own borrowers rather than market commentary. He says: “We focus on what makes us comfortable with lending to a person, and we are cognisant of managing our exposure through the 14 · Australian Securitisation Journal | Issue 14_2018

risk-mitigating strategies we have in place – such as low LVR.” Smyth acknowledges that macroeconomic factors, such as interest rates, unemployment and availability of credit, could cause ripples in the market. However, he also argues that the nonbank sector as a whole has a part to play in mitigating what could otherwise be steep corrections. “Nonbanks can play an important role in ensuring equilibrium and that there isn’t a cliff, particularly regarding availability of credit,” he says. “We want to position our business for the cycle and ensure we have longevity through that cycle. We are confident that our strategy allows us to do this – and Cerberus is supportive of this.” Rehayem says KKR was “very impressed by the experience and capability of the Pepper management team”. He adds: “This was a crucial attraction point as it is something KKR

Also, Pepper encourages borrowers to seek independent legal and financial advice as part of their decision-making process. Entering into a credit contract is an important decision, and Pepper understands this. Over a number of months, we became acquainted with Pepper’s management team and recognised its talent and the opportunity in the market for growth. At the same time, Pepper’s management got to know the KKR team and the breadth and capabilities of our global platform, and how it could help them achieve their objectives. This is how our partnership came to be. Pepper also stood out as one of the largest nonbank issuers in the securitisation market, with a global presence, a track record of servicing global clients and an international investor base. We very much believe in the strength of this global business because, while banks are wellcapitalised, our view is that excess leverage in the financial system is a far more important driver of big cyclical downturns than excess consumer indebtedness. We think Pepper is well-positioned to navigate this set of challenges given its reputation as an issuer and its role as a service provider. This applies in Australia, New Zealand and its international business.

which areas do you see the greatest potential for growth, for Pepper specifically and for the nonbank sector as a whole? We see great potential in developing and expanding Pepper’s operations in its existing geographies. Part of the impetus behind our investment in Pepper was that we shared a deeply aligned view with management on the macro picture of the lending and servicing opportunity sets within the geographies in which Pepper already operates. A good portion of our focus will remain on growing within those bounds. This said, we also anticipate strategically moving into new geographies as opportunities arise. For example, we see a lot of potential to replicate in Asia the efficient and responsible-servicing expertise we have demonstrated in Europe. Regardless of whether we focus on expanding at home or abroad, it remains true that businesses like Pepper are capital-hungry. There is a generally direct – almost dollar-for-dollar – correlation between strong sales and growth, and increased funding requirements. These businesses can really thrive alongside the support of a well-capitalised private owner and partner. Regarding broader industry observations, we think there’s an opportunity for nonbank lenders further to strengthen their position as

can leverage off as well. Combining two businesses with strong management teams brings a new level of diversity to those businesses.” He also reveals that there is a longstanding relationship between KKR and Pepper, stretching back to before the financial crisis. This gave Pepper comfort in going through with the transaction. “There were many other private-equity firms eager to partner with Pepper. However, we felt that culturally and in aspiration where we want to take the business aligned best with KKR,” Rehayem tells ASJ. Meanwhile, O’Neill reports that the “depth and calibre of La Trobe Financial’s management team and its highly disciplined approach to loan origination, underwriting and asset management processes were key components in Blackstone’s decision to partner with the company”.

a financial-solutions provider to people and parts of the economy that would otherwise be underserviced. The players that will win long term will be those that do so in a sustainable and socially responsible manner, and we’re proud of the way Pepper continues to differentiate itself in this regard.

There is always a lot of attention given to the Australian housing sector in the media and political spheres, with issues such as high household debt levels and interest-only loans being prevalent. What is your overall view on risk in Australia’s lending sector? The headlines can be scary, but we have a more nuanced view as we survey the landscape. Growth is still strong, and we see limited reason to believe there will be any material pick-up in unemployment. The banks are well-capitalised, and our view is that excess leverage in the financial system is a far more important driver of big cyclical downturns than excess consumer indebtedness. Also, while we are cautious on real-estate pricing in parts of Australia, lending at prudent loan-to-value ratios against core, domestic, demandsupported housing stock still feels like a prudent bet. Pepper is doing this as well as anybody.

GROWTH POTENTIAL Performance is also a key attraction for private-equity firms. Each of the nonbanks indicate that their past results as well as expected future growth potential were particularly appetising for large-scale equity investment. However, specific investor interest again focused on each lender’s particular plans rather than being a simple vote of confidence in the sector. O’Neill reveals that La Trobe Financial’s asset originations now exceed A$7 billion annually. He adds: “With banks being forced to restrict lending to certain profitable niches, a larger market share is now contestable. The market need for this type of specialist lending is likely to result in an extended growth phase for La Trobe Financial.” Meanwhile, Smyth points out that Bluestone has a strong track record of origination and raising money via securitisation 15

FEATURE

“With increasing pressure on the banking sector to tighten creditassessment standards – which may have been less than industrial strength – it is a reasonable proposition for the nonbank sector to continue to grow from its current low base.” GREG O’NEILL LA TROBE FINANCIAL

and is on a steep growth trajectory for its programmes. “We also facilitate more than A$6.5 billion of mortgage servicing and system services for third parties. This means Bluestone is well equipped to scale up its own operations with the injection of private-equity capital.” Rehayem says Pepper is coming off six consecutive years of growth in its Australian mortgage-origination business. He explains that the company is focusing on continuing this as well as expanding into new asset classes, such as commercial real-estate lending, with the help of its new investor. “KKR is opening up its network of funders and investors to assist us and add to the established funders we have in our stable,” Rehayem points out. Going forward, Smyth says there is still growth to be found in the specialist-lending space in which Bluestone currently operates. But – assisted by its new capital injection – the company is also looking to scale up operations in the near-prime space and facilitate deals with more mainstream borrowers. “We have a near-prime product which we haven’t to date been as focused on. But looking at the market it is probably in the less-credit-impaired area where the significant volume growth is,” says Smyth. Specific nonbank lenders’ international ambitions played different roles in the private-equity injections. Pepper’s global aspirations made the KKR deal such a good fit for the company, according to Rehayem. He says: “We are like-minded companies in that we are constantly chasing new businesses to acquire. Pepper has acquired eight businesses in the last 6-7 years, with each of them growing successfully in their own jurisdictions and areas. We have plans to buy more businesses offshore – and KKR sees the value in this.” Bluestone has recently returned to lending in New Zealand, meanwhile, where it had been a lender and securitisation issuer prior to the financial crisis. However, Smyth says, while the firm is ahead of its own forecasts this part of the business strategy was likely not a major consideration for Cerberus when it engaged with Bluestone. “New Zealand is an area which an incoming investor might think is interesting but it is likely not the centre of attention. There are still runs to be put on the board in the specialist and near-prime spaces in Australia, and this is where our immediate growth prospects are,” confirms Smyth. 16 · Australian Securitisation Journal | Issue 14_2018

TERM MARKET PLANS With new investors and a positive operating environment providing stimulus to the nonbanks’ growth plans, the chief executives are optimistic about how private-equity investment will affect securitisation potential. All three issuers have been active residential mortgage-backed securities (RMBS) issuers in 2018 and all similarly see potential for larger and more frequent deals. Bluestone issued two RMBS deals in each of 2016 and 2017 as it looked to ramp up its activity following a return to the market in 2013. Smyth reveals an expectation that the company will issue two deals again in 2018, with the potential to grow to three depending on pace of lending growth. While Bluestone priced its first RMBS deal for the year just prior to its takeover announcement, Pepper and La Trobe Financial had already had some time under their new arrangements. Both executed their largest transactions to date early in the first months of 2018, printing A$1 billion and A$750 million respectively. While Pepper will likely maintain the frequency with which it accesses markets, the volume of individual transactions may continue to grow. Rehayem says the volume of Pepper’s most recent securitisation deal was a function of growth in the company’s Australian mortgage business rather than evidence of a scaling up in operations since the partnership with KKR. “We have no issues originating volume, but in the past we have had to monitor the capacity of what we originate by way of funding or capital. Our partnership with KKR means we no longer need to worry about this element,” Rehayem tells ASJ. Smyth is also confident of achieving larger deal volume. He says: “Being on a strong growth trajectory and having access to a larger balance sheet means the size of the deals we issue will increase significantly over the next 12-24 months.” At the same time, reduced pressure on capital will also mean Bluestone can be more selective around the timing of its transactions, Smyth adds. Meanwhile, La Trobe Financial intends to continue to be a regular issuer of large, high-quality RMBS, according to O’Neill. He says the issuer’s latest deal demonstrates a commitment to meet its growth and development targets. “With loan originations exceeding A$7 billion per year, this was a very pragmatic step to complement our broad institutional mandates and our A$2.2 billion credit fund.” ■

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COPUBLISHED ROUNDTABLE

Green securitisation takes its next step in Australia In February, National Australia Bank (NAB) included a A$300 million (US$225.1 million) green tranche in a A$2 billion residential mortgage-backed securities (RMBS) transaction – the first issue of such notes in the Australian residential market. At the end of April, NAB’s securitisation team gathered interested parties to talk about the challenges and potential of green RMBS issuance in a jurisdiction where the framework for identifying and verifying qualifying assets is very much in its infancy. PARTICIPANTS ◆ Rob Fowler Head of Certification CLIMATE BONDS INITIATIVE ◆ David Jenkins Director, Sustainable Capital Markets NATIONAL AUSTRALIA BANK ◆ Lionel Koe Director, Securitisation NATIONAL AUSTRALIA BANK ◆ Andrew Marsden General Manager, Treasury and Securitisation RESIMAC ◆ Phil Miall Head of Credit Research and Strategy QIC ◆ Grace Tam Associate Director CLEAN ENERGY FINANCE CORPORATION ◆ Eva Zileli Head of Group Funding NATIONAL AUSTRALIA BANK MODERATOR ◆ Laurence Davison Managing Editor KANGANEWS

18 · Australian Securitisation Journal | Issue 14_2018

DEFINING ASSETS Davison What were the considerations involved

in identifying qualifying mortgage assets for NAB’s green RMBS tranche, and incorporating these in a larger securitisation structure? ◆ ZILELI

It was actually relatively easy once we had the Climate Bonds Initiative (CBI) proxy criteria for Australian low-carbon residential buildings. Without these, the challenge would have been establishing a means by which to classify a mortgage as green. The criteria solve this issue, giving us a scaleable standard to apply to our portfolio. When we cut the RMBS pool, we had an extra layer of criteria to overlay – being the year of construction of the mortgage security in the three states involved: New South Wales (NSW), Tasmania and Victoria. But this was relatively straightforward.

Davison What is the background to the CBI

proxy criteria? Specifically, how did the CBI determine that the proxy standards used around date of construction were sufficient to define a green mortgage in Australia? ◆ FOWLER

Going back to first principles, the idea of the climate-bond standards is to help investors very easily identify the bonds and other debt instruments financing assets that are consistent with a low-carbon future. These are things like clean energy, electric vehicles, electrified public transport, and energy-efficient and low-carbon buildings. With each sector we assess and set of criteria we produce, we put together an expert working group to opine on how the sector will look under the 2050 vision of a low-carbon economy. This group then tries to draw back to what assets are available now – what is around today that is consistent with the vision. This is pretty easy in the energy sector – it’s solar and wind power, for instance. With buildings, we are looking to achieve zero carbon emissions in 2050. But there aren’t many zerocarbon buildings around at the moment, and restricting the criteria to these wouldn’t be very useful. The next step is for the working group to identify assets that are consistent with rapid transition to the future state. What the working group settled on, in the absence of zeroemissions buildings, is the top 15 per cent in emissions performance of what is available now. It doesn’t stop there, though. What we have also done is draw a straight line down from the top 15 per cent in the 2010s to zero in 2050 – with the line becoming the threshold that has to be met to be eligible over time. This is a technical, science-based approach put together by the working group. It is pretty straightforward to apply to commercial buildings, because we can get the number for emissions associated with individual buildings. We don’t have the same

sort of information available in the Australian residential sector – though it exists in some other parts of the world. We take a tiered view when we are trying to develop a specific approach for a particular region. The top tier is where we have data available on the real performance of building stock in the region and class of property. In the UK and the Netherlands, there is a publicly available database that lists the energy consumption and therefore the emissions of every address in the country. Banks in these countries can scour the database, match it with their own data and readily identify the properties in their own portfolios with top 15 per cent performance. If the data isn’t available, the next tier is to look for some sort of detailed rating of residential property. NSW has such a thing – called BASIX – and it provides the proxy approach we use for NSW. If something like this isn’t available, we go to the third tier. This is a little bit trickier, because we are trying to find an approach that is practical and easy for a bank to use but which also helps identify the top 15 per cent performers in residential stock. There is a lot of residential stock in Australia and the turnover – the rate at which new builds come into the market – is less than 1 per cent. If we can say new builds are more efficient than existing stock, we are able – for a few years and in a time-limited way – to say these new builds are in the top 15 per cent of performers for energy efficiency. Before we say definitively we can use this as a proxy in Australia, though, we have to test the correlation. We have seen tighter nationwide house energy rating scheme (NatHERS) standards around things like thermal integrity in the fabric of a building. While this doesn’t go as far as BASIX it does correlate well with emissions in places where there is a predominant heat load. Here we are talking about places where heating is the predominant use of energy like Tasmania and, to a slightly lesser extent, Victoria. When the NatHERS standards were tightened and became mandatory it enabled us to include Tasmania and Victoria in our proxy standards. The predominant use of energy in places like NSW, Queensland and Western Australia is cooling, so there isn’t nearly as much correlation. We are looking for alternate proxies that are appropriate for warmer-climate states.

We wanted to incorporate the NatHERS rating and building codes into a year-of-build output. We think this gives banks something they can easily use to identify qualifying loans in their own books. We believe the approach we have adopted is the best proxy we can come up with in Australia – for now. We hope that at some stage there will be a national data set available to us. Some of the data are already out there, they just aren’t stitched together in a usable way.

SCALE OF COLLATERAL Davison How do the proxies work in practice,

given the lack of standardised data available?

“OUR ASSUMPTION IS THAT WE HAVE A LOT MORE ASSETS THAT COULD THEORETICALLY BE CLASSIFIED AS GREEN THAN IS THE CASE SO FAR. WE HAVE GONE THROUGH A PROCESS OF TRYING TO CLASSIFY ASSETS AS GREEN, BUT IT’S EASIER TO DO WITH LARGE DOLLAR-VALUE ASSETS.” EVA ZILELI NATIONAL AUSTRALIA BANK

COPUBLISHED ROUNDTABLE

Global context LOCAL MARKET PARTICIPANTS FREELY ACKNOWLEDGE THAT AUSTRALIA IS FOLLOWING THE MARKET LEADERS IN SUSTAINABLE FINANCE – INCLUDING RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS). WITH LITTLE GOVERNMENT GUIDANCE, THE PRIVATE SECTOR IN AUSTRALIA IS LARGELY GOING IT ALONE.

Davison What lessons can Australia learn from the rest of the world when it comes to developing a green mortgage asset class? JENKINS Scale is obviously a key

difference between Australia and some other markets. But actually I think we are quite progressive in some of the innovative products being brought to market in this sector. We are certainly not lagging in this respect. Where other countries have an advantage is around the existence of policy and tax incentives to drive capital into these investments. In Australia, any development is driven purely by a cost-benefit analysis or by market participants’ desire to do – and be seen to do – the right thing. Countries like France also have regulatory requirements around

◆ TAM

things like environmental, social and governance (ESG) risk that are driving investment flows. In particular, they are extremely focused on green investments – far more so than we are in Australia, though we are improving rapidly. The US is on a different trajectory, but it is catching up from a lower base. Overall, I’d say Europe is at least two or three years ahead of the US in ESG integration and capital allocation, with Australia a year or so behind Europe and Asia in between the two. KOE There are certainly advantages to be gained from leveraging off developments in offshore jurisdictions. One thing we’ve been keen to impress on domestic issuers is the scale of investor funds that are already available, particularly from offshore accounts, and the pace at which it

Data is a critical issue. We lack data on residential properties in Australia, even though this sector contributes about 12 per cent to total national emissions. The CBI has established a baseline, which we view as very positive. We have the same view on the NAB RMBS – it is good to see this sort of initiative around existing properties, and it demonstrates there is a viable capital-markets option in this sector even though there is a data shortfall. ◆ ZILELI It’s important to look at proxy criteria for eligible mortgages in context. With a balance sheet the size of NAB’s, our assumption is that we have a lot more assets that could theoretically be classified as green than is the case so far. We have gone through a process of trying to classify assets as green, but it’s easier to do with large dollar-value assets especially in the infrastructure space. It’s much harder at SME level. The size and quantity of loans needed to support a green bond would mean quite intensive work. If the system doesn’t facilitate a simple way of identifying a loan as green – via adding an appropriate field at origination – it becomes operationally cumbersome. There is a lot of untapped potential across the bank, and we are working on identifying it. But it takes a lot of time and effort. Having proxy criteria available in something like the residential mortgage market is very helpful in this context. 20 · Australian Securitisation Journal | Issue 14_2018

◆ JENKINS

is growing. The availability of more granular data, and government- and industry-led initiatives, will allow the asset class to develop domestically. ZILELI Ultimately, I believe we will reach a stage of critical mass at which nongreen bonds will be disfavoured by investors and will struggle to reach full subscription. Across the world, investors are actively searching for green bonds in which to invest. JENKINS There is definitely a scarcity of supply relative to the demand that already exists. We have also seen, even in Australia, a degree of additional stickiness among ESG-mandated investors. They have an incentive to buy during the bookbuild process and, all things being equal, they tend to stay involved and therefore support improved pricing outcomes in the secondary market.

We took a conservative approach to the pool for the RMBS transaction, starting with the inclusion of new-build only. This puts aside a lot of homes that have been upgraded. In NSW, for instance, if you do a home renovation costing A$50,000 or more and requiring development approval you are now required to get a BASIX certificate. We excluded these from our pool because doing so gives certainty around the concept of best in class. We also excluded apartments in NSW entirely, because our loan tagging didn’t incorporate the certainty of BASIX 40 certification we felt we needed. This illustrates the challenges involved in identifying appropriate assets subsequent to the loans being written. If you don’t have your own information from the outset and it is not readily available publicly, you have to rely on build and approval dates. ◆ FOWLER This relates to our attempt to expand the proxies we have available. Our criteria for project upgrades allow for assets to become eligible if they can demonstrate an appropriate degree of improvement in energy efficiency. We are looking at this concept in the residential space – for instance whether the installation of rooftop solar should make a house available by reducing the use of a coal-reliant state energy grid. Again, this would be easier to do if the data were available.

ZILELI I agree with the point about

investor stickiness – to the extent that I would already feel more confident about execution of a green deal than a nongreen one, at least in Europe. Something that is becoming more prevalent in Europe is the prominence of ESG teams at the investment firms we meet, applying another layer of analysis on green transactions. We don’t yet see this in Asia, Australia or the US. KOE The point about shortage of supply is real, and the fact that green deals attract new investors has already been mentioned in this discussion. In fact, we are discussing hosting sessions for US and European accounts that have never bought Australian RMBS but are interested in the asset class should there be more supply of green securities. ZILELI Supply is definitely important here in Australia. This is a new asset class – we issued the first major-bank green bond in 2014 – and issuance has not always been frequent. If there is more supply of any product, investors will

take interest. In this case, it might mean more dedicated funds are set up. If you established a dedicated green-bond fund in Australia two years ago there wouldn’t have been much domestic product to invest in. JENKINS Equally, what we hear from investors – particularly in Europe – is that there is no appetite for gimmicks. Most issuers that have priced green bonds have been clear that they want to be repeat issuers, and this is important for investors. KOE Australian issuers are definitely looking at the green RMBS space. It might take a while to build momentum given the involvement and data-related requirements for certification. But from

Davison Would the potential to access new investors be the main goal for Resimac should it decide to issue a green RMBS at some stage? MARSDEN It would be extremely

important. Sourcing reliable, diversified funding is a priority for any issuer in the nonbank space. Accessing this through green issuance will take time, but we certainly believe it to be a real opportunity. The fact that National Australia Bank has opened the door as an issuer only helps to demonstrate this is the case.

“We are discussing hosting sessions for US and European accounts that have never bought Australian RMBS but are interested in the asset class should there be more supply of green securities.” LIONEL KOE NATIONAL AUSTRALIA BANK

Davison Hypothetically speaking, if it became

possible tomorrow to apply proxy criteria to mortgages in a greater number of Australian states would some of the collateral in the NAB RMBS no longer qualify – because it is no longer in the top 15 per cent? If so, would this be problematic for either the issuer of or investors in the green RMBS tranche? ◆ KOE

discussions with other issuers we are confident of more issuance.

The current CBI Australian low-carbon residentialbuilding proxy criteria are based on the minimum design standards for thermal efficiency and energy efficiency of Australian residential buildings within select states. Importantly, the criteria were developed to evolve – and get stricter – in order to achieve a zero emissions target for the residential-building sector by 2050. As such, the criteria impose building cut-off dates in each state in which they apply. Consequently, usage of a closed pool, overcollateralisation of eligible green mortgages and the relatively short-dated – three-year – weighted-average life (WAL) of the green note were all built into the structure to ensure the note would continue to meet the CBI certification requirements during its life. All parties are aware that the criteria should and will improve in time, but we were also cognisant of making sure

that the green notes remain climate-bond certified with regard to eligible assets. ◆ FOWLER It’s important to note that what we’re looking at is exposure to eligible assets. What investors want to know is that the bond is ‘green enough’, for instance that the lender is continuing to follow its internal procedures, and that the assets are a part of the low-carbon future. Line of sight to the assets is the most important thing here. The structure of the security and how it funds the assets – whether it be senior unsecured or an RMBS, for instance – is less important from our perspective.

Davison Is the point here that, while all parties

are aware that the 15 per cent proxy bar will move over time, it was sufficient for the initial green RMBS to incorporate assets that met the criteria at the point of issuance? ◆ KOE

Exactly. This is also why we had the data externally verified at the time. ◆ MIALL This is Australia’s first green RMBS transaction and we certainly expect that the asset class should and will evolve over time. This means the asset pools will change, and while it’s hard to take a specific view on how this will play out the standards should be dynamic. 21

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With this in mind, there are two areas of particular importance for us. First is that the standards and the assets genuinely support environmental sustainability. Second is that there’s clarity and transparency regarding the green criteria and how the underlying assets meet these.

We are building an eligible set of securities that could be used as green issuance collateral. This is just a systems change going forward, but it takes a lot of work to implement retrospectively.

Davison NAB’s loan book was big enough to

the rate at which Australian housing stock turns over in relation to the composition of the top 15 per cent cut-off for energy-efficient loans?

collateralise a A$300 million green RMBS tranche even with the limitations being discussed. But what is the story on scale for a relatively smaller mortgage lender like Resimac? ◆ MARSDEN

We ran an exercise on our portfolio last year, in which we tried to overlay the CBI methodology using year of construction as the main proxy data point. Even though around 40 per cent of our book is in NSW, as others have said the real sticking point was availability of data. There was no means by which we could tag even the construction year of the underlying security in our loans, which made it a very intensive exercise of pulling the original loan documentation and security appraisals to get the information we needed. Since that process, something we have done internally – because we are pursuing issuance, albeit only at some future stage – is to start looking at ways formally to expand the form of security valuation to highlight green features. This means having a record of things like low-carbon buildings and sustainable water management, as well as date of construction of course.

Davison Has there been any modelling around

◆ JENKINS

The way the criteria are designed includes a finite tenor, which in a capital-markets sense is expressed as a cap on WAL for green issuance. The expectation is that this tenor cap will rise over time as the performance of the housing pool improves. The WAL limit is defined on a state-by-state basis. In the case of the NAB transaction, this entailed a threeyear WAL green tranche. This will on average be paid down much more quickly than the limitation within the CBI criteria. The CBI’s intention is to re-evaluate the criteria every two years, so in all likelihood next time we issue it will be under revised collateral criteria. ◆ FOWLER The time limitation on the use of proceeds is important. As discussed, we expect to see the proxies updated frequently – at least every two years – and we are working on alternative methodologies and standards all the time. As I’ve said, the line down to zero in 2050 is the starting point. From there, what we hope to do in Australia is move up the tiers, from a building-code proxy to something more

“WHAT INVESTORS WANT TO KNOW IS THAT THE BOND IS ‘GREEN ENOUGH’ AND THAT THE ASSETS ARE A PART OF THE LOW-CARBON FUTURE. LINE OF SIGHT TO THE ASSETS IS THE MOST IMPORTANT THING.” ROB FOWLER CLIMATE BONDS INITIATIVE

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detailed to, in the end, criteria based on actual performance data. This is really about bringing together what’s already there: I can see my energy use on a half-hourly basis online using my meter number, but this information hasn’t yet all been brought together in one place.

Davison Presumably the idea is that, over time,

a greater proportion of the asset base qualifies as green on the basis of zero-emissions status, rather than by being in a group of the best – but still non-zero-emissions – properties? ◆ FOWLER

That’s right. It’s about establishing a threshold, which will continue to decline over time in a predictable way. There will be interim stages on the way – for instance by 2040 we could have 80 per cent of residences being zero emissions. Again, this is somewhat easier to do in the commercialproperty sector. In Sydney, for instance, buildings have a level of emissions of carbon dioxide per square metre that is defined based on data analysis and doesn’t have to be redefined every year. We just take the number and draw a straight line on a chart down to zero in 2050 – which becomes the threshold. This is a tier-one analysis, which is very predictable and is really the ideal situation. We have to keep working to get to something similar in the residential market.

Davison This sounds like a typical securitisation

practice: start by writing loans in an appropriate form and – with clear data and over time – establish track record suitable for inclusion in capital-markets structures. ◆ MARSDEN

That’s exactly right. There are some incentives for us to pursue this type of funding structure, and we also have some plans around product development at the front end of the business. ◆ TAM There is a wider issue here, which is that although at this stage we are talking specifically about the CBI criteria we shouldn’t forget that technology is developing quickly. We have an innovation fund at Clean Energy Finance Corporation (CEFC) that has done two transactions to fund start-up companies in this space. One is using machine learning to optimise solar generation, storage and management for households. The other is smart meter, which allows households to monitor energy usage.

The point is that anyone doing financing in this space should consider upcoming technology that could give a much clearer benchmark and baseline around energy consumption. ◆ KOE Looking back on the NAB transaction, we strongly feel that it demonstrates the potential of green securitisation as an asset class. It certainly opens the door to more activity. We have already heard that the CBI is exploring widening its criteria to other states and that there is a lot of interest in facilitating this, underpinned by better data capture and tracking. The key will be how well we as an industry can improve data capture and adopt a broadly consistent framework on data capture and interpretation.

TRANSACTION CONSIDERATIONS Davison How did the deal process work around

the classification of assets and their place in the RMBS pool? ◆ KOE

This was a very relevant consideration, and there were a number of practical challenges around the selection criteria. As Australia’s first green RMBS transaction we were very conscious of ensuring it would be well received. Additional analysis was undertaken to ensure the CBI criteria did not have any unintentional consequences on concentrations – by state, property location and seasoning. This meant working very closely with investors so they could understand the qualifying criteria and were comfortable that this wasn’t ‘greenwashing’. We talked at length with investors about the formulation of CBI’s criteria, potential criteria changes in future, strength of the underlying pool and structural features. This got them comfortable and led to a very successful transaction.

Davison The fact that only three Australian

states have CBI criteria for green mortgages means the green assets in the NAB RMBS pool were inevitably concentrated – albeit NSW and Victoria obviously represent quite a large proportion of the whole market. How did the concentration risk question play out in the deal process? ◆ KOE

There were certainly a lot of questions around this. Among the structural benefits of the transaction is the fact

“TO THE EXTENT THAT IT’S POSSIBLE, WE REALLY WANT TO SEE PERFORMANCE DATA – SO WE CAN ESTABLISH WHETHER THERE IS ANY PERFORMANCE DIFFERENTIAL BETWEEN GREEN AND NONGREEN RECEIVABLES.” GRACE TAM CLEAN ENERGY FINANCE CORPORATION

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Asset evolution THE BROADER CONTEXT OF GREEN MORTGAGE-BACKED ISSUANCE IS THE DRIVE AMONG LENDERS BETTER TO UNDERSTAND THE SUSTAINABILITY CREDENTIALS OF THE ENTIRETY OF THEIR ASSET BOOKS. THERE IS MUCH WORK STILL TO BE DONE.

Davison Conceptually, it seems that the development of the green mortgage is an early – but critical – step in defining what is green at the consumer end of banks’ balance sheets. Meanwhile, verification, certification and reporting on institutional-scale lending is becoming progressively easier to do and more prominent. Is the big challenge going to be the middle piece – getting to grips with what is and is not green lending in, for instance, the SME sector? ZILELI It’s an area I have an eye on,

and National Australia Bank has a working group looking at other loans on the balance sheet. But it’s absolutely correct to say this is the biggest challenge yet for attribution and verification – it is fraught with difficulties, to be quite honest. JENKINS Just as its is with mortgages, the big issue is data integrity. A bank’s systems need to be set up to cater for the relevant criteria and have all assets tagged appropriately within those systems.

The institutional lending space is really the low-hanging fruit in this respect. We have a system called LoanIQ, which allows us to drill down into what are large, lumpier loans to develop comfort around eligibility, scale and use of funds. Consumer mortgages are at the other end of the scale, but the product is fairly generic and the accreditation system here is relatively robust – albeit with plenty of room to evolve. It is the space in between that is hardest to define. There are still gaps, but we are trying to fill them.

Davison Is it fair to say that, eventually, lenders and investors will have to move past the low-hanging fruit and wrestle with the most challenging segments of banks’ balance sheets? JENKINS Yes, no doubt – but it’s

important to understand the nature of the challenges. It’s hard enough to define and track a green corporate loan, which is why we have use-ofproceeds criteria. To take it to the next level – SME lending – removes

“To take it to the next level – SME lending – removes the economy of scale around use of proceeds. What we’d like to find is assets that can be aggregated.” DAVID JENKINS NATIONAL AUSTRALIA BANK

that the repayment of all notes – including the green note – is based on performance of the entire pool. As an investor in the green note, credit performance is based on the whole pool, while funding proceeds of the green note are specifically applied towards financing identifiable and eligible green mortgages. This approach made investors very 24 · Australian Securitisation Journal | Issue 14_2018

the economy of scale around use of proceeds. We’d like to find assets that can be aggregated, perhaps along the lines of the SME lending facility we have developed with the Clean Energy Finance Corporation (CEFC). TAM In this case it doesn’t come down to data but definition. Based on our own internal mandate, we came up with eligibility criteria for the SME lending facility that we gave to the participating banks. I don’t think there is a market standard for green loans at SME level, though there are lots of competing product offerings that claim to be such. JENKINS The green-loan principles take the green-bond principles into the loan space, and as with green bonds they are predicated on use of proceeds and assurance of these. But, again, it’s much easier to work with lumpier loan facilities and we are yet to see a suitable model for taking this down to smaller borrowers. It shouldn’t be impossible, as we have seen with the CEFC facility around eligible projects. This would enable smaller loans to be tagged as green loans and therefore for banks to tag them as eligible collateral for future green-bond issuance of their own. TAM CEFC has the advantage, though, of doing its own due diligence on an ongoing basis – around banks’ lending relative to the parameters we have established, including looking for corroborating evidence. This is a lot of effort, but it means we understand green loans in the SME space.

comfortable and mitigated potential concerns around statebased concentrations. ◆ ZILELI To the point about the significance of the eligible states, it’s worth noting that approximately 69 per cent of NAB’s whole mortgage book is in those three states. Had it been the 31 per cent that was in eligible states it might have been

more of an issue – but I don’t think investors were especially concerned about concentration risk in more than two-thirds of a total, nationwide book. ◆ MIALL Concentration is something we look at in all RMBS deals. We expect green-mortgage criteria eventually to allow homes in other states within Australia to become eligible, but concentration wasn’t a concern for us in this transaction as the green notes have recourse to the transaction’s whole mortgage pool rather than just the green mortgages. It’s the geographic diversification of the entire mortgage pool that’s relevant, and we are comfortable with the pool in this regard.

Davison Picking up on the point about full-

book credit risk, what would happen if the collateral backing the green tranche started to underperform? ◆ KOE

The relevant states, particularly NSW and Victoria, represent the majority of exposures in both the RMBS and the demographics of the national population. As such, there is a high degree of correlation between the performance of these states and the broader RMBS transaction. ◆ TAM To the extent that it’s possible, we really want to see performance data – so we can establish whether there is any performance differential between green and nongreen mortgages. Use of proceeds and ongoing certification according to CBI standards is also important. ◆ ZILELI We are really in the earliest stages of developing this product and its issuance, at least in Australia. I expect other issuers will follow us, and as more do we will start to build up a track record of green-mortgage performance. When we have this kind of historical data we can start to look more closely at differential pricing. I don’t think we should be asking investors to give up on spread just to ‘do the right thing’, but if the data backs this up there could be a discussion based on demonstrable quality of loans.

Davison We have talked about the green RMBS

as a closed pool, but is there any requirement on the issuer when it comes to ongoing reporting after issuance? ◆ ZILELI

We undertook to investors that we would offer annual verification by an independent third party, as we have with our other green bonds, as a minimum – and ideally impact reporting as well. Impact reporting is actually quite difficult in what is an emerging space and we are still working on it with our unsecured green bonds. Adherence to the climate-bond standards is part of the ongoing verification process, so as a minimum we have to demonstrate use of proceeds throughout the life of the deal. We will report on the size of the green-mortgage pool available, ensuring this meets the scale of the green notes outstanding. We have built in some structural features to the RMBS including overcollateralising the green pool. We can’t say this

“guarantees” meeting the use-of-proceeds test, but we have sized the pool conservatively at 1.5 times overcollateralisation and a pay-down flow in line with all the other mortgages in the pool. Investors should be comfortable that their funds will remain allocated to green collateral. ◆ MIALL The deal’s undertaking to provide ongoing independent, annual verification is something we look for and value. We understand that the composition of the green portfolio can change based on prepayment flows, but our expectation is that this should be covered by overcollateralisation in the green tranche. ◆ FOWLER As with all the asset classes for which we have developed criteria, the key consideration in the mortgage space is around continuing to demonstrate eligibility of assets. The requirement for a solar farm is minimal because it’s going to remain a solar farm and this is obviously consistent with a low-carbon future. With a building, we need to see ongoing reports to ensure it is not falling below a low-carbon threshold and the straight line to 2050 that we have discussed. With residential property, the nature of the proxies in Australia means there is not much more we can do after accreditation. We would like to see a more dynamic process with RMBS as we move up the tiers and get more data involved. This could mean structures evolving on a deal-by-deal basis in the medium term. On impact reporting, what we have seen is that this becomes less important once there are accepted standards in any specific area. Impact reporting is what market participants rely on to satisfy themselves that an asset is ‘green enough’. But once standards are in place they tend to feel less of an imperative to convince themselves over and over again.

FINDING INCENTIVES Davison Rob Fowler mentioned the desirability of

moving to tier-one criteria for green mortgages – with a publicly available, standardised data set for loans – from the current tier three. Would the most straightforward solution be a government-sponsored scheme for emissions scoring in residential property, and what can the private sector do on its own through incentives? ◆ MARSDEN

A national standard would certainly be very helpful for us, given mortgage lenders have diverse asset portfolios. It would also help us develop new and innovative products and bring a lot of efficiency and motivation around distribution of those products – perhaps with some economic incentives for householders. ◆ FOWLER We are certainly seeing a strong drive towards government incentives in other parts of the world. This is happening in Europe, China and – at state level, at least – the US. There is very strong action to put incentives in place for green finance to flow. 25

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In Australia, we could consider things like a green homeowners’ grant to sit alongside the first homeowners’ grant. There is a range of initiatives the government could take to make it easier for consumers to realise the benefits of going green. There would be a lot of work to do around integrity of labelling, but these conversations are happening elsewhere in the world and confidence is growing where they do. ◆ JENKINS At root, the incentive for homeowners is the potential for a materially cheaper cost of funding and the question is how we get to the point where this is possible. Putting aside what might or might not come from government, it should be cheaper to run a more energyefficient house. One question might be whether this has a knock-on positive effect on serviceability and thus credit risk. On the other side, if we look at what’s happening in Europe around green finance and the associated capital allocation, we could ask if there should be a regulatory penalty for brown assets or an incentive for green assets. If the dial is shifted such that there is a policy framework that rewards assets that contribute to a low-carbon future, conceptually this should allow banks to lend at a lower cost to those assets. This would be another incentive to borrowers to do more than the bare minimum. NAB has developed a product with the CEFC targeting the SME sector, that offers a discount to a borrower’s regular cost of funds to invest in energy-efficient business assets like vehicles. This has been a sufficient incentive to make plenty of SMEs opt for these assets. ◆ ZILELI This scheme is subsidised by the government, though. The question is what will entice banks to offer a discount for green loans – and whether a national assessment system could be sufficient. My sense is that, absent third-party incentives, there needs to be an established connection between green mortgages and credit performance in order to persuade banks to offer discounted pricing.

Davison Can funding markets provide an

incentive by offering superior outcomes for green debt product? ◆ TAM

We have to keep sight of the fact that climate-change mitigation is the goal here. Improving building efficiency delivers benefits to householders and to the environment, as well as reducing stress on the grid. What this means is

that, on the funding side, we are seeing signs of differential pricing between green and nongreen assets in offshore markets – because there is extra demand coming from growing awareness of climate-change issues in the general population. ◆ MARSDEN I agree that the demand story starts at the front end – for example the growing desire of superannuation investors to tick the ethical or green box on their funds. ◆ KOE There isn’t currently a clear pricing differential between green and nongreen bond issuance in primary markets. But issuers understand that green notes allow them to access new investors, and also create new opportunities for existing investors with growing allocations of socially responsible investment capital or mandates in addition to their traditional mandates. This was certainly the case with the NAB green RMBS. We think demand for green RMBS will only grow with increased supply from a range of issuer types. ◆ MIALL Growing demand for green product could see a price differential at some point but the domestic market isn’t there yet. From our perspective, while we have a strong environmental, social and governance (ESG) framework across all our portfolios we don’t have ESG-specific mandates at this stage. The case for paying up to invest in green assets is probably clearer for mandated funds. ◆ JENKINS There were also accounts that wouldn’t traditionally look at asset-backed transactions but engaged with NAB because its deal was green. I have also met investors subsequently, including offshore, who wouldn’t normally think about Australian RMBS but have asked to be considered in the deal process next time. ◆ MARSDEN For Resimac, when we consider green issuance the two main attractions are what we could call a moral obligation to be a good corporate citizen and the incremental investor diversification on offer. There isn’t a price incentive at the moment but there is enough value in diversifying the RMBS bid – especially in the triple-A space – to incentivise us to build regular green issuance into our overall funding programme. ◆ JENKINS The consistent message we hear from investors is that every RFP process they go through includes a requirement to lay out their sustainable-investment options. Green bonds are the starting point, then on into social bonds, green securitisation and so on.

“WE RAN AN EXERCISE ON OUR PORTFOLIO IN WHICH WE TRIED TO OVERLAY THE CBI METHODOLOGY USING YEAR OF CONSTRUCTION AS THE MAIN PROXY DATA POINT. THE REAL STICKING POINT WAS AVAILABILITY OF DATA. THERE WAS NO MEANS BY WHICH WE COULD TAG EVEN THE CONSTRUCTION YEAR OF THE UNDERLYING SECURITY.” ANDREW MARSDEN RESIMAC

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Davison Putting together the two main themes of

this discussion – data and incentives – in theory perfect data wouldn’t just mean some assets can be labelled green but that every asset could be defined as green or not green. How much of a difference would this make to the way capital is allocated? ◆ JENKINS

I was at a conference in London recently where the key focus of discussions was around transitioning balance sheets and investor capital to green from brown. Defining all assets is a perfect way of doing just that – it allows investors to allocate capital in a way that isn’t purely exclusionary, for instance by focusing on the greenest of green investments. I’m sure the same thing would apply in the RMBS market. ◆ TAM We don’t solely rely on certification – we actually do a lot of due-diligence on underlying assets. This is required for us to be in compliance with the CEFC Act. This allows us to see different ‘shades’ of green and the evolution of the definition over time – though I’m sure it’s the same with CBI criteria. Our hope is that we will be able to achieve more emissions reduction as definitional technology improves over time. ◆ MIALL If data eventually allows a much greater proportion of assets to be defined as green or nongreen then, yes, it probably would increase incentives for ‘greenness’ by contributing to differential pricing. But this nirvana may not happen any time soon, which makes it important that investors’ focus on sustainability considers the traditional bond market as well as the green-bond market. In the traditional bond market, fixed-income investors can still incentivise change by engaging with issuers specifically on ESG. By doing so, investors can better understand what an issuer’s approach to sustainability is and also give feedback on areas where an issuer should be doing more.

Davison Grace Tam has mentioned consumers’

growing desire to help mitigate climate change. Rather than talking about cheaper home loans for green properties, shouldn’t socially aware consumers be willing to pay more for energyefficient homes? ◆ TAM

Yes, but of course budget constraints around the cost of putting energy-efficiency measures in place are always going to be the main consideration. I think this is where it falls to

the lender to understand what it might be able to do around affordability in this specific regard – to be able to advise on the best structure for a borrower who wants a home-loan package that is both energy-efficient and affordable. ◆ JENKINS As a consumer, the market for things like solar systems and batteries is confusing: it is difficult to figure out what is best value, best in class and most appropriate. There is no shortage of packages available, but it’s hard to know that one is getting independent advice when choosing a package. ◆ MARSDEN I think the point is that consumers are already bearing the cost of installing things like solar panels and battery packs. I don’t think there is much prospect of them also paying more for green mortgages.

Davison Could lenders offer incentives, perhaps

around lending limits if not loan pricing, to borrowers wanting to improve home energy efficiency? Is there any view on whether the type of borrower who is motivated to make these kinds of improvements might have a better credit-risk profile? ◆ ZILELI

As far as I’m aware, we don’t take into account a borrower’s desire to add green features to their house or whether it already meets the CBI criteria when writing loans. To be honest, I wouldn’t assume that a borrower focused on energy efficiency would be more creditworthy than any other. Perhaps in time we will have data to support this, but it isn’t apparent in the data we have. ◆ MARSDEN What we find is that the takeup of low-carbon features is most prevalent in brand-new houses in new suburbs. This is certainly the case with solar-panel installation. There is obviously some economic incentive to do so, but it isn’t in loan pricing. Overall, my sense is that to have a transformational change on consumer behaviour at the front end there needs to be some sort of official encouragement – whether this be by tax rebate, direct investment or anything else. I think consumer views are changing, if slowly, at least to the extent that they are willing to take advantage of things like rebates on solar panels. ◆ JENKINS If you look at the takeup of electric vehicles in countries with tax incentives to do so you can see the potential impact – these markets are charging ahead. ■

“WE CERTAINLY EXPECT THAT THE ASSET CLASS SHOULD AND WILL EVOLVE OVER TIME. THIS MEANS THE ASSET POOLS WILL CHANGE, AND WHILE IT’S HARD TO TAKE A SPECIFIC VIEW ON HOW THIS WILL PLAY OUT THE STANDARDS SHOULD BE DYNAMIC.” PHIL MIALL QIC

COPUBLISHED PROFILE

AUSTRALIAN EXECUTOR TRUSTEES – IN FOR THE LONG HAUL Australian Executor Trustees (AET) continues to work towards expanding its market presence by leveraging off its hundred-year-plus history. Sydney-based Stuart Howard, head of corporate trust, and Glenn White, senior manager, business development, give the lowdown.

here do you see the trustee market heading in the coming years and where do you hope to be present? ◆ WHITE With several new entrants in the Australian trustee space, we expect the market to become increasingly competitive in the coming years, enabling better delivery of services for clients, competitive price tension and more efficient systems. We hope to expand our presence and take advantage of our experience and longevity while having continued support from our parent company, IOOF. ◆ HOWARD Increasing competition raises the bar for everyone. Complacency isn’t something that will be tolerated by anyone using a service such as ours. We need to continue to provide our services in a cost-effective, professional and efficient way. We have done a lot of work over the last 10-12 years to increase our visibility and brand awareness, which we will continue to build on. We also enjoy the support of IOOF. It is a large, well-credentialed organisation and we want to put ourselves forward as a very professional, service-driven business. Are you are focusing on specific sectors, for example securitisation? ◆ HOWARD Our corporate-trust business is quite diverse. Securitisation is part of it, but we provide a range of services to debt capital markets, funds management and equity capital markets.

28 · Australian Securitisation Journal | Issue 14_2018

We continue to talk with established issuers and service providers, but we also want to be in front of any new entrants or companies that are thinking of joining the market. Where are the opportunities coming from and where do you see the biggest opportunities for growth? ◆ WHITE In securitisation we see a lot of opportunity in the fintech space, specifically in peer-to-peer lending operations. These projects are still in the startup phase but will require different financing arrangements as they evolve. Green and climate bonds are also flavour of the month right now. This is likely to continue, as a consequence of growing awareness of environmental issues combined with increasing regulation. ◆ HOWARD Over the years our business has benefited from being on board with startups and boutique clients. We have never been about starting at the big end of town. It is more about the grassroots level and providing a personalised service to get businesses where they need to be. This becomes a long-term partnership rather than just a standalone arrangement. Is the Australian corporate-trustee market reaching an inflection point? ◆ WHITE There is a drive for experienced capability which has led to an opening for new entrants and increased competition. Businesses want their trustees to be smaller, nimbler and service-focused.

As a result, smaller players will likely become more collaborative in their approaches. This is important, particularly on the big regulatory issues. ◆ HOWARD Clients are also becoming more focused on service and individual personnel. Whether institutions are big or small, businesses need people who are skilled and experienced, and who understand their requirements. It is easy to have a tick-the-box mentality, but fiduciary obligations are fundamental to the trustee role. Understanding these fiduciary obligations – why they are there, the powers a trustee has and when these powers can or should be exercised – is sometimes lost or commoditised. It can become a race to the bottom, purely based on price. What are your perspectives on the value of competition in the sector – and what can AET do to promote its own offering to potential clients? ◆ HOWARD The difficulty is convincing potential clients of the reasons why they should change providers. The process is not problematic, but it can be costly given the requirement for legal and commercial advice on any potential change. We therefore need to be identifying the new entrants. We need to be in front of them to demonstrate that we can provide this service and partner with them in their success. In the past we have only provided a limited range of services, but we are currently looking at ways to expand our product set.

ABOUT AET

AET’S OFFERING

ustralian Executor Trustees (AET) is one of Australia’s largest and most experienced nongovernment providers of professional trustee services, with more than A$32 billion (US$24 billion) in funds under supervision as at 28 February 2018. Established in 1880, AET offers a comprehensive range of specialist trustee services through three core businesses: ◆ Corporate trust ◆ Private-client services ◆ Superannuation AET is a national trustee company with offices in all mainland Australian states and territories. AET’s corporatetrust business is a leading provider of quality corporate-trust services to the Australian financial services industry. It is based in Sydney. The company’s dedicated management team has extensive experience in all aspects of corporate trusts and provides a wide range of services tailored to the needs of each client. The AET corporate-trust business provides the following services to clients throughout Australia: ◆ All trustee, security-trustee and agency services to debt capital markets ◆ Trustee services to retail and wholesale note issues ◆ Custodian for managed investment schemes ◆ Trustee for wholesale trusts ◆ Escrow and process-agent services

AET’s structured-finance and securitisation services include: ◆ Acting as trustee, security trustee, standby servicer, standby trustee, trust manager (through an outsourced third party), issuing and paying agent, registrar and calculation agent for securitisation programmes, publicprivate partnerships (PPP) and debt funding. ◆ Acting as facility agent on corporate debt funding as well as process agent where an offshore issuer into the Australian market needs an Australian address for service of notices. ◆ Directorships and corporate-governance services for special-purpose vehicles set up as part of structuredfinance and securitisation transactions.

COMPANY HISTORY

KEY PERSONNEL

AET has been providing trustee services for more than 135 years. The company has evolved through the merger and acquisition of companies such as Austrust, IOOF Trustees, ABN AMRO Trustees and, more recently, National Australia Trustees. As a wholly owned subsidiary of IOOF Holdings (an ASX-100 listed company with ASX Code “IFL”), AET is part of a wider wealth-management group which consists of the following companies: ◆ Australian Executor Trustees ◆ Bridges Financial Planning ◆ Consultum Financial Advisers ◆ IOOF Alliances ◆ Ord Minnett ◆ Shadforth ◆ Lonsdale IOOF recently agreed to acquire ANZ’s aligned dealer groups, and pensions and investments business.

The team at AET has extensive experience facilitating complex deal negotiations in all aspects of securitisation, structured-finance and wider debt-capital-market transactions.

WHY CHOOSE AET? AET is an experienced professional trustee with a client-service focus. Its strengths are an agile approach, personalised service and ability to work with clients to achieve their desired outcomes. AET takes pride in being commercial and working closely with clients on complex finance transactions to ensure they are completed within the required time frames. AET, with backing from its parent IOOF, has the credentials to perform trustee roles for securitisation programmes. Its staff have the skills, knowledge and expertise in the securitisation and broader corporate-trust industries to provide trustee services to securitisation lenders, issuers, arrangers and investors.

◆ C ontact details

Glenn White Senior Manager, Business Development glenn.white@aetlimited.com.au +61 2 9028 5922 | +61 406 380 793 www.aetlimited.com.au

COPUBLISHED PROFILE

LONG-TERM APPROACH FOR EQUITY TRUSTEES James Connell, senior manager, structured finance at Equity Trustees in Sydney, talks to ASJ about the firm’s ambitions, the opportunity set for corporate trustees and the future direction of the sector.

here do you think the Australian trustee market is heading? My overall view is that the Australian trustee sector is undergoing a phase of liberalisation and increased competition. Going back five years, Australia had four active corporate-trustee firms. In five years’ time I think there could be roughly the same number of key players again – each with its own unique selling point and speciality. If the market can reach this point, it will be more reflective of how the corporate-trustee landscape operates globally. Good examples are Hong Kong and Singapore, where four key global players command the market. Australia is unusual in this regard, and feedback we receive from international clients is that they are surprised by the limited choice. To say this is a symptom of the Australian market being too small is an oversimplification. The size of the market should not determine the number of players. What are Equity Trustees’ main points of differentiation compared with other trustee firms in Australia? There are several areas where independent, specialised fiduciaries operating outside the banks can succeed, for example as security trustee. At the point of default, it is imperative to have an independent trustee in the architecture as opposed to one associated with a single lender. The bread and butter of Equity Trustees is to discharge fiduciary services and this is the real value we bring:

30 · Australian Securitisation Journal | Issue 14_2018

whether for philanthropic, private or outsourced responsible-entity clients, the origin of Equity Trustees is fiduciary services. We know that is is a challenge to entice clients away from existing arrangements and there has to be a compelling reason. We are fully aware we have high-quality competitors, so we understand that apart from being motivated by a bad client experience, the only other way is to clearly show we can add value through service and efficiency, and develop great relationships. We can deliver exceptional service performance along with the assurance that as a 130-year old company we will be with them for the long run. Where are the opportunities coming from and what is the biggest prospect for growth? Because our brand is less well-known at this stage, we are particularly focusing on marketing to potential clients that have no pre-existing allegiances. We take comfort from the fact that the securitisation market in Australia is evolving. With this growth and the fact that Equity Trustees is now competing assertively, we are confident we will be able to acquire some market share. Equity Trustees entered the outsourced responsible-entity business 18 years ago and is an acknowledged industry leader in this space in Australia. It makes business sense to leverage our unique position as an established fiduciary to support Equity Trustees becoming a market leader in securitisation in the Australian corporate-trustee space. Being less established means we need to work harder. We must pay close

attention to fees, service delivery and responsiveness, all of which make the client experience better. Where we have an edge on some competitors is that even though we are a new entrant in this product line, we are not a new company. We have demonstrated our ability to execute complex transactions in the outsourced responsible-entity business. When I have spoken with clients, although they may not necessarily be familiar with the brand they do join the dots. They see a specialised fiduciary, someone with nearly two decades of experience in the industry and they also see the need for a liberalisation of providers. The big residential mortgagebacked securitisation providers to the smaller players all appreciate the benefit of choice. They know it will act as a restraint on prices and promote an increase in service quality. For any business that is looking for a long-term partner, our strategy is to grow with them, outperform their expectations and partner with them on their corporate journey. What is your view on trustee companies branching out beyond what they traditionally do? Being a good trustee is complicated – the law, transactions, market, clients and investors are all complex people. This is challenging enough as it is. We are not a sponsor or an originator but a service provider. I think we should ‘stick to our knitting’ as a trustee agent and do it well. Client feedback we receive is on the basis of competence and professionalism as a trustee or agent and we’re happy with these measures.

ABOUT EQUITY TRUSTEES

SERVICES

quity Trustees was established in 1888 for the purpose of providing independent and impartial trustee and executor services to help families in Australia protect their wealth. As Australia’s leading specialist trustee, we offer a diverse range of services to corporate clients, banks, lenders and borrowers as well as individuals, families and corporate clients. The corporate-trustee-services division is responsible for more than A$60 billion (US$45 billion) of funds under management. It provides responsible-entity and corporatetrustee services to more than 100 leading local and international banks, financiers, investment managers and superannuation funds. Equity Trustees has a market capitalisation of approximately A$350 million with annual revenue in excess of A$80 million. It employs more than 250 staff nationally.

Equity Trustees provides a full range of trustee services for banks, financiers, lenders, borrowers, international investment managers and sponsors. These include: ◆ Note trustee ◆ Security trustee and agent ◆ Facility agent ◆ Issuing, calculation and paying agent and registrar ◆ Trustee and custodian for direct property funds ◆ Escrow agent ◆ Trustee, security trustee and standby servicer for securitisation and master-trust structures

COMPANY HISTORY Equity Trustees was established as the Equity Trustees Executors and Agency Company in 1888 – one of the founding directors was Edward Fanning, great grandfather of current chairman, the Hon. Jeff Kennett AC. It has grown and thrived to become a national company. Significant acquisitions have included ANZ Trustees, in 2014, and the estates and trusts part of the Bendigo and Adelaide Bank-owned Sandhurst Trustees, in 2017. In the corporate-trustee business, expansion has included the company’s first move overseas with the purchase of 60 per cent of London-based Treasury Capital, enabling Equity Trustees to offer fund-governance solutions to clients in the UK and Ireland, and the acquisition of the OneVue RE business completed in 2018.

WHY CHOOSE EQUITY TRUSTEES? Equity Trustees is Australia’s leading specialist trustee, with a growing business focused on structured finance and debt capital and loan markets trust and agency services. The company’s structured-finance team has decades of specialist experience in Australian and global contexts. Its key people bring together legal and finance industry expertise in securitisation, debt capital markets transactions, structured and secured lending structures, funds management and property finance.

◆ C ontact details

James Connell Senior Manager, Structured Finance P: +61 2 9458 5509 M: +61 428 526 863 E: jconnell@eqt.com.au

EQUITY TRUSTEES LIMITED ABN 46 004 031 298 AFSL 240975 EQUITY TRUSTEES LIMITED (EQUITY TRUSTEES) IS A SUBSIDIARY OF EQT HOLDINGS LIMITED. EQT HOLDINGS LIMITED IS A PUBLICLY LISTED COMPANY ON THE AUSTRALIAN SECURITIES EXCHANGE (ASX: EQT) WITH OFFICES IN MELBOURNE, BENDIGO, SYDNEY, BRISBANE, PERTH AND LONDON.

COPUBLISHED PROFILE

ETICORE ADVANCES Under the leadership of Sydney-based chief executive and founder, Belinda Smith, new entrant to the Australian trustee space, Eticore, is taking advantage of securitisation issuers’ desire for flexibility in an increasingly competitive sector.

here do you see the trustee market heading in the coming years and where do you hope to be present? I expect the structured debt capital markets to continue to grow as authorised deposit-taking institutions (ADIs), nonbanks, fintechs and all forms of companies with a cash-flow stream look to securitisation and structured finance as a viable funding option. Of course, digital disruption and distributed ledgers will bring about change in the trustee’s role. However, there will continue to be a fiduciary role in some form and structures will always require providers for different services, be it management of liabilities and assets, reporting or analytics. Eticore currently offers, and will continue to offer, a wide range of trustee and associated services. This said, we will determine our strategic direction on our view of the future. This is why Eticore is focused on employing cutting-edge technologies and efficiencies. We expect the trustee market to become a higher-volume, lower-margin business, but still with the need to tailor to specific and unique structures, clients and asset types. Where are the opportunities coming from and where do you see the biggest opportunities for growth? We are gaining great traction in trustee roles for internal securitisations. ADIs and nonbanks are taking advantage of a more competitive environment and looking for flexible options. Fintechs are naturally gravitating to Eticore as a service provider, given our technology focus and data-security practices as well

32 · Australian Securitisation Journal | Issue 14_2018

as our ability to tailor solutions and help them step-by-step through the capitalraising process to issuance. Our new client-to-existing-issuer mix is around 75 per cent to 25 per cent at the moment, but we expect this to move towards an even split by the end of the current year. Most of our clients are attracted to our service model and turnaround times, combined with experienced and known securitisation experts, and top-tier legal counsel advising us on legal and regulatory matters. What are your perspectives on the value of competition in the sector? I think competition in any industry is valuable and essential to ensuring the market is functioning efficiently and effectively. We have been pleasantly surprised and humbled by the support we have received from investors, issuers and other service providers in the market. They see value in the services we offer and the differentiation from existing platforms. Issuers have been discussing any number of ways they can work with us – be it on whole-loan books they buy and parcel up, backup servicing of asset portfolios or licensing our analytical model. The large and growing industry, funding a range of assets securitised by an extremely varied group of companies, means there is not only room but also a desire for diverse trustee service-provider options. Increased competition in our market ties in nicely with the crux of the Productivity Commission report published earlier in 2018, and the constant stream of support for increased financial-services competition being cited in the media.

What are the challenges and opportunities you face as a relatively new entrant and a smaller player? A start-up does bring challenges in establishing brand and confidence, but it also brings the valuable prospect of starting with a clean slate – there are no legacy systems or processes to cause roadblocks or inefficiencies. People naturally think that smaller can mean riskier. Eticore has had due diligence undertaken by numerous issuers and funding banks, and they have been surprised and excited by the sophistication of our systems, processes, data-security practices and software. Large size and scale can be a hinderance rather than a benefit at times, and Eticore has the agility to move quickly in relation to new technologies, regulations and market best-practice, gleaned from offshore operators as well as domestically. Many of the cuttingedge technologies we employ enable us to be more efficient and secure, and more effective at mitigating risk than established companies. What is your view on trustee companies branching out beyond provision of traditional fiduciary services to offer associated products and services to the market? It makes sense, provided it is not to the detriment of the key trustee fiduciary role. Trustee companies need to be thinking about their future and the changing nature of their role in our market, and are often in a suitable position to offer associated services for a structure. However, secured creditors should be considering and measuring the entity exposure they have in their portfolios, the same way they consider originator and servicer risk.

ABOUT ETICORE

ticore operates in the corporate-trust space, providing financial and analytical services for securitisation, structured-debt and managed-investment vehicles. Eticore is a privately-owned Australian company, funded by 13 equity investors. The Eticore name came about as the founders looked for derivations of the word ‘ethics’ and ‘ethical’. They settled on Eticore, with an underlying implicit belief that ethics must be core to all that the company does. Eticore intrinsically believes that not only do ethics, transparency and a positive behavioural culture work hand-in-hand with commercial success and corporate growth, but in today’s environment they are also essential to achieving these goals. The company prides itself on upfront and transparent interactions and engagements, with comprehensive servicelevel agreements around time delivery and quality.

COMPANY HISTORY The company was founded in 2016 by Belinda Smith, who sought to create a corporate-trust and financial-services business that provides exceptional service, standards and culture for all stakeholders. The Eticore team is passionate about providing the industry with a choice it believes to be superior. After 20 months of operations, Eticore has secured more than 25 engagements, spanning a range of roles including trustee, security trustee, trust accounting, analytical modelling, back-up servicing and trust management. Asset classes have also been varied, from residential mortgages to consumer loans, and agriculture to commercial property.

ETICORE’S OFFERING Eticore’s services span requirements for debt capital markets issuers as well as funders and investors. These include corporate and security trust, agency, trust accounting, trust management and back-up servicing. Also offered are more bespoke and nonstandard services, such as Reserve Bank of Australia repo-eligible reporting for securitisation, analytical modelling, creation and delivery of trust-management models, policies and processes, and tailored staff training. This last service has been popular with smaller banks and nonbanks that would like to retain trust management in-house but need some assistance to implement and maintain best practice in this area. Eticore’s securitisation model has successfully launched in the market. The model analyses credit, cash-flow and security valuations. It contains a range of other helpful features including data validation, the ability to run on loan- or pool-level data, and the ability to run a loan-level data pool for multiple securitisation issuers to estimate

credit risk. This feature has been highly valued by funders and investors wishing to measure their portfolio-wide expected credit risk.

WHY CHOOSE ETICORE? Eticore differentiates itself through its exceptional service mindset and delivery model. Often a service provider will make an approach to a new client with a suite of services it is prepared to offer. But Eticore’s approach is to talk with clients to find out their strategic position and business direction, and thus provide a tailored solution for each. Securitisation market growth is not slowing, with repeat issuers and abundant new entrants in the warehouse and term space. Eticore’s challenge is to find and deliver services of a higher quality with features and extras that its competitors cannot, or will not, offer. Hence Eticore’s tailored offering is not just licensing but in some cases building and delivering models and solutions for clients. Eticore has documented service-level agreements in its engagements and its clients have access to team members 24 hours a day and seven days a week. To accomplish this, the company works in rotating periods to ensure team members are always available for domestic and offshore clients.

KEY PERSONNEL The Eticore team is a handpicked group of technically knowledgeable, experienced fiduciary professionals who believe not only in performing their duties but in making the process as timely, simple and straightforward as possible for the client. Combined, the team has more than 50 years’ experience in structured debt, capital markets and managed funds. Team members have worked not only in Australia but across jurisdictions including the Netherlands, Japan, Singapore, the UK, the US, Taiwan and Hong Kong. Team members also have experience working across a range of asset classes. They have worked for a wide variety of market participants including industry bodies, banks, nonbanks, trustees, rating agencies and fund managers.

◆ C ontact details

Belinda Smith Chief Executive Officer belinda.smith@eticore.com.au +61 2 8278 9520 www.eticore.com.au

ISSUER PROFILES

ANZ BANKING GROUP

AMP BANK AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

YES

AUSTRALIAN ADI

PROGRESS

SECURITISATION PROGRAMME NAME

USE O F SE CU RI T IS A T IO N TYPE OF SECURITISATION ISSUED

AUSTRALIAN FINANCE GROUP YES

AUSTRALIAN ADI

KINGFISHER

SECURITISATION PROGRAMME NAME

AFG

U S E O F SECURITISATION

USE OF SECURITISATION

TYPE OF SECURITISATION ISSUED

PRIME RMBS

TYPE OF SECURITISATION ISSUED

PROPORTION OF OUTSTANDING 21% WHOLESALE FUNDING SOURCED VIA SECURITISATION

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

1.2%

PROPORTION OF OUTSTANDING 44% WHOLESALE FUNDING SOURCED VIA SECURITISATION

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$19BN

TOTAL VOLUME ISSUED*

A$6.5BN

TOTAL VOLUME ISSUED

A$1.5BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

77% DOMESTIC 23% OFFSHORE

TOTAL DOMESTIC VS OFFSHORE ISSUANCE*

48% DOMESTIC 52% OFFSHORE

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

A$4.4BN

OUTSTANDING VOLUME OF SECURITISED ISSUES*

A$1.4BN**

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$548M

OUTSTANDING VOLUME OF SECURITISED ISSUES

PRIME RMBS

ormed in 1849, AMP Group is Australia and New Zealand’s leading independent wealthmanagement company, with an expanding international investmentmanagement business and a growing retail-banking business in Australia. AMP Bank is an Australian retail bank offering residential mortgages, deposits, transaction banking and self-managed superannuation-fund products, with around 100,000 customers. It also has a small portfolio of practice-finance loans. AMP Bank distributes through brokers, AMP advisers and direct to retail customers via phone and internet banking.

◆ please contact:

Gwenneth O’Shea Head of Securitisation +61 2 9257 5823 gwenneth_oshea@amp.com.au www.amp.com.au/securitisation 34 · Australian Securitisation Journal | Issue 14_2018

* Excluding internal securitisations. Reported values are based on initial amounts securitised at the time of each securitisation. ** As at 26 March 2018.

NZ Banking Group (ANZ) is one of the four major banking groups headquartered in Australia. ANZ provides a broad range of banking and financial products and services to retail, small business, corporate and institutional clients in Australia, New Zealand and the AsiaPacific region. The bank began its Australian operations in 1835, its New Zealand operations in 1840 and has been active in Asia since the 1960s.

◆ please contact:

Scott Gifford Head of Debt Investor Relations +61 3 8655 5683 scott.gifford@anz.com Mostyn Kau Head of Group Funding +61 3 8655 3860 mostyn.kau@anz.com John Needham Head of Structured Funding +61 2 8037 0670 john.needham@anz.com www.anz.com

PRIME RMBS

ustralian Finance Group (AFG) is one of Australia’s leading companies when it comes to financial solutions. Founded in 1994, AFG has grown to become one of the largest mortgage-broking groups in Australia with a loan book of more than A$140 billion. Listed on the Australian Securities Exchange in 2015, AFG has in excess of 2,900 brokers across Australia distributing more than 3,800 finance products supplied by AFG’s panel of more than 45 lenders. AFG leverages its tier-one technology platform proactively to manage its relationship with lenders, brokers and customers. AFG commenced offering its own securitisable home loans in 2007. These loans are funded by multiple warehouses and term transactions. ◆ please contact:

Ben Jenkins Chief Financial Officer +61 8 9420 7035 ben.jenkins@afgonline.com.au Toni Blundell Manager, Securitisation +61 8 9420 7811 toni.blundell@afgonline.com.au www.afgonline.com.au

AUSWIDE BANK AUSTRALIAN ADI SECURITISATION PROGRAMME NAMES

YES

AUSTRALIAN ADI

YES

AUSTRALIAN ADI

ABA TRUST

SECURITISATION PROGRAMME NAME

REDS (RMBS), REDS EHP (ABS), IMPALA (ABS)

SECURITISATION PROGRAMME NAMES

SAPPHIRE, EMERALD

USE O F SE CU RI T I SA T IO N TYPE OF SECURITISATION ISSUED

BANK OF QUEENSLAND BLUESTONE GROUP

U S E O F S ECURITISATION

USE OF SECURITISATION

TYPE OF SECURITISATION ISSUED

PRIME RMBS, ABS

TYPES OF SECURITISATION ISSUED

PROPORTION OF OUTSTANDING 64% WHOLESALE FUNDING SOURCED VIA SECURITISATION

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

PROPORTION OF OUTSTANDING 90% WHOLESALE FUNDING SOURCED VIA SECURITISATION

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

PRIME RMBS

RMBS, REVERSE MORTGAGE

A$3.7BN

TOTAL VOLUME ISSUED

A$23.2BN

TOTAL VOLUME ISSUED

A$7.2BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

92% DOMESTIC 8% OFFSHORE

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

90% DOMESTIC 10% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$497M

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$2.9BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$1.3BN

* All figures as at 28 February 2018.

uswide Bank became Australia’s 10th, and Queensland’s third, Australian-owned bank to be listed and traded on the Australian Securities Exchange, in 2015. Auswide Bank operates 23 branches from Cairns in north Queensland to Brisbane in the south east. Auswide Bank has extensive operations across Australia via third-party arrangements. Auswide Bank has Australian credit and financial-services licences issued by the Australian Securities and Investments Commission. It is an authorised deposit-taking institution supervised by the Australian Prudential Regulation Authority. The bank offers a range of personaland business-banking products and services issued directly or in partnership with leading service providers via branches, strategic relationships and online and digital channels. ◆ please contact:

Dale Hancock Group Treasurer +61 7 4150 4025 dhancock@auswidebank.com.au www.auswidebank.com.au

ank of Queensland (BOQ) is a public company incorporated with limited liability under the laws of Australia. BOQ is domiciled in Australia, is listed on the Australian Securities Exchange and is regulated by the Australian Prudential Regulation Authority as an authorised deposittaking institution. The bank had total assets under management of A$51 billion as at 28 February 2018.

◆ please contact:

Tim Ledingham Treasurer +61 7 3212 3342 tim.ledingham@boq.com.au James Shaw Head of Funding +61 7 3212 3835 james.shaw@boq.com.au www.boq.com.au

luestone Group (Bluestone) is a dynamic financial-services business with more than 160 employees and operations in Australia, New Zealand and the Philippines. In March 2018, Bluestone’s Asia-Pacific operations were purchased by Cerberus Capital Management – a leading private-investment firm with more than US$30 billion under management. In 2000, Bluestone began originating mortgages in the Australian market. After a hiatus, the company recommenced mortgage origination in 2013. With vast experience in the mortgage space, Bluestone has cemented its place in the sector. The investment from Cerberus will see Bluestone broaden its product suite to have an increased focus on near-prime borrowers and, in the longer term, a move into other loan products. ◆ please contact:

Campbell Smyth Chief Executive Officer +61 2 8115 5167 campbell.smyth@bluestone.com.au www.bluestone.com.au 35

ISSUER PROFILES

CITI AUSTRALIA

COLUMBUS CAPITAL

AUSTRALIAN ADI

YES

AUSTRALIAN ADI

SECURITISATION PROGRAMME NAMES

SECURITISED AUSTRALIAN MORTGAGE TRUST, CITI CARDS AUSTRALIA MASTER TRUST

SECURITISATION PROGRAMME NAME

USE O F SE CU RI T IS A T IO N

COMMONWEALTH BANK OF AUSTRALIA

AUSTRALIAN ADI

YES

TRITON

SECURITISATION PROGRAMME NAME

MEDALLION

U S E O F SECURITISATION

USE OF SECURITISATION

TYPE OF SECURITISATION ISSUED

PRIME RMBS

TYPE OF SECURITISATION ISSUED

49%

PROPORTION OF OUTSTANDING 5% WHOLESALE FUNDING SOURCED VIA SECURITISATION

PRIME RMBS

TYPE OF SECURITISATION ISSUED

PRIME RMBS, CREDIT CARD ABS

NUMBER OF SECURITISATIONS ISSUED

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

TOTAL VOLUME ISSUED

A$13.5BN

NUMBER OF SECURITISATIONS ISSUED

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

NUMBER OF SECURITISATIONS ISSUED

100% DOMESTIC

TOTAL VOLUME ISSUED

A$3.1BN

TOTAL VOLUME ISSUED

A$63.8BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$3.4BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

80% DOMESTIC 20% OFFSHORE

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$1.5BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$14.8BN

s part of one of the world’s largest financial-services companies with a presence in nearly 100 countries, Citi Australia has been providing financial services to Australian clients for more than 30 years. Citi has been servicing and managing asset-backed portfolios since 1995. As of the end of March 2018, Citi had a A$7.7 billion portfolio of Australian mortgage assets and a A$5 billion portfolio of Australian creditcard assets, with around 30% of these assets securitised. There have been 15 issues from the SAMT programme, 18 from the legacy Compass Master Trust programme and one from the Citi Card Australia Master Trust programme. The SAMT structure is an active programme that has been in operation since 2003.

olumbus Capital was established in 2006 as a nonbank wholesale funder. In 2012, it acquired Origin Mortgage Management Services, its third-party wholesale lending business, from ANZ Banking Group. Columbus Capital has Australian credit and financial-services licences issued by the Australian Securities and Investments Commission. The company offers an extensive range of white-label home-loan products via strategic relationships and also via its online channel focused solely on the prime mortgage space. Columbus Capital also offers third-party servicing capabilities covering home loans, consumer-finance, lease and commercial ABS products.

ommonwealth Bank of Australia is Australia’s leading provider of integrated financial services including retail, premium, business and institutional banking, funds-management, superannuation, insurance, investment and share-broking products and services. The bank’s approach to wholesale funding is to remain diversified across markets and to maintain a degree of flexibility around transaction timing. Wholesale funding is complemented by securitisation issues through the Medallion programme.

◆ please contact:

Charles Finkelstein Country Treasurer +61 2 8225 6096 charles.finkelstein@citi.com William Mortimer Head of Securitised Products, Australia & New Zealand +61 2 8225 2503 william.mortimer@citi.com www.citi.com/australia 36 · Australian Securitisation Journal | Issue 14_2018

◆ please contact:

Karl Sick Treasurer +61 2 9273 8132 karl.sick@colcap.com.au www.colcap.com.au

◆ please contact:

Ed Freilikh Executive Manager, Group Funding +61 2 9118 1337 edward.freilikh@cba.com.au www.commbank.com.au/ groupfunding

CREDIT UNION AUSTRALIA AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

YES HARVEY

USE O F SE CU RI T I SA T IO N TYPE OF SECURITISATION ISSUED

FLEXIGROUP

FIRSTMAC

PRIME RMBS

PROPORTION OF OUTSTANDING 54% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$8BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE OUTSTANDING VOLUME OF SECURITISED ISSUES

AUSTRALIAN ADI

SECURITISATION PROGRAMME NAME

FIRSTMAC MORTGAGE FUNDING TRUST

SECURITISATION PROGRAMME NAME

FLEXI ABS, Q CARD TRUST

U S E O F S ECURITISATION TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING 75% WHOLESALE FUNDING SOURCED VIA SECURITISATION

USE OF SECURITISATION TYPE OF SECURITISATION ISSUED

ABS

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

35%

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$2.5BN >80% DOMESTIC A$600M

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$21.6BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

91% DOMESTIC 9% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$2BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$7.2BN

redit Union Australia (CUA) has a long and proud history of providing banking and financial services to Australians. CUA is Australia’s largest customer-owned financial institution with nationwide representation through branches in Queensland, New South Wales, Victoria and Western Australia. CUA is an authorised deposittaking institution and is regulated by the Australian Prudential Regulation Authority.

irstmac is among Australia’s preeminent nonbank prime home-loan lenders and is one of the top-10 RMBS issuers in the securitisation market. From March 2017 it has funded approximately A$3.5 billion in new home loans and issued A$3.9 billion in prime RMBS. Firstmac has funded in excess of 100,000 home loans. Over the past 16 years it has evolved its homeloan programme distribution model from 100% third-party origination to predominantly self-originated retail through its market-leading online platform, www.loans.com.au. Firstmac has also diversified its business to now include auto and equipment financing and a managedinvestment-fund offering. ◆ please contact:

◆ please contact:

Len Stone Treasurer +61 7 3552 4662 leonard.stone@cua.com.au www.cua.com.au

James Austin Chief Financial Officer +61 7 3017 8883 james.austin@firstmac.com.au Paul Eagar Director, Securitisation +61 2 8579 8403 paul.eagar@firstmac.com.au www.firstmac.com.au

All data as at April 2018.

n Australian Securities Exchange 200-listed Australian public company, FlexiGroup is a diversified financial-services group providing point-of-sale interestfree, no-interest-ever, credit-card, managed-services, leasing and vendor programmes to consumers and businesses. FlexiGroup operates in Australia, New Zealand and Ireland. FlexiGroup operates under a number of brands including Lisa, FlexiCommercial, Certegy, Oxipay, Once, Lombard (Australia), and Q Card, Farmers Finance Card, Q Mastercard and Flight Centre Mastercard (New Zealand). FlexiGroup has been an annual issuer from its Certegy brand since 2011 and from the Q Card Trust – a revolving, continuous-issuance vehicle – since 2014.

◆ please contact:

Paul Jamieson Group Treasurer +64 9 525 8593 paul.jamieson@flexigroup.co.nz Bianca Spata Head of Group Funding +61 2 8905 2625 bianca.spata@flexigroup.com.au www.flexigroup.com.au 37

ISSUER PROFILES

HERITAGE BANK AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

IMB BANK

YES

AUSTRALIAN ADI

HBS

SECURITISATION PROGRAMME NAME

US E O F SE CU RI T IS A T IO N

ING BANK (AUSTRALIA) YES

AUSTRALIAN ADI

YES

ILLAWARRA

SECURITISATION PROGRAMME NAME

IDOL

U S E O F SECURITISATION

TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

TYPES OF SECURITISATION ISSUED

APPROX. 55%

NUMBER OF SECURITISATIONS ISSUED

12 PUBLIC DEALS, 3 AUD WAREHOUSES, 1 AUD INTERNAL SECURITISATION, 1 AUD PRIVATE DEAL

PROPORTION OF OUTSTANDING 47% WHOLESALE FUNDING SOURCED VIA SECURITISATION

TOTAL VOLUME ISSUED

APPROX. A$6.8BN EQUIV.

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

APPROX. 63% DOMESTIC 37% OFFSHORE*

OUTSTANDING VOLUME OF SECURITISED ISSUES

APPROX. A$950M EQUIV.

* By original issuance. Only domestic issues remain.

eritage Bank (Heritage) is Australia’s largest mutual bank with approximately A$9.5 billion in total consolidated assets as at 31 December 2017. It is a public company, limited by shares and guarantee, which operates as a mutual organisation. The mutual business structure is an integral component of Heritage’s operating philosophy. Heritage is an authorised deposittaking institution, regulated by the Australian Prudential Regulation Authority.

◆ please contact:

Rob Staskiewicz Structured Finance and Capital Manager staskiewicz.r@heritage.com.au Stuart Murray Term Debt and Liquidity Manager murray.s@heritage.com.au Heritage Treasury +61 7 4694 9500 www.heritage.com.au 38 · Australian Securitisation Journal | Issue 14_2018

PRIME RMBS, SMALL-TICKET CMBS

NUMBER OF SECURITISATIONS ISSUED

7 RMBS, 3 CMBS

TOTAL VOLUME ISSUED

A$3.6BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$374M

stablished in 1880, IMB Bank (IMB) has been helping people achieve their financial goals for 138 years. IMB offers a full range of banking solutions including home and personal lending, savings and transaction accounts, term deposits, business banking, financial planning and a wide range of insurance and travel products. IMB is regulated by the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission. It is a member of the Customer-Owned Banking Association. IMB has more than 190,000 members and total assets in excess of A$5.7 billion.

◆ please contact:

Mark Workman Treasurer +61 2 4298 0172 mark.workman@imb.com.au Ian Witheridge Senior Manager, Finance +61 2 4298 0256 ian.witheridge@imb.com.au www.imb.com.au

USE OF SECURITISATION TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

25%

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$10.2BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

99% DOMESTIC 1% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$3.6BN

NG – the trading name of ING Bank (Australia) – is a branchless retail bank. It is part of the world’s leading direct-savings bank and is wholly owned by ING Group. It offers products in retail mortgages, transactional banking, retail savings, specialised commercial-property markets and retail superannuation. With more than A$39 billion in retail and business deposits, A$44 billion in retail mortgages and 1.8 million customers, ING is one of the largest home lenders in Australia.

◆ please contact:

Peter Casey Deputy Treasurer +61 2 9018 5132 peter.casey@ing.com.au Antony McNaughton Treasury Manager +61 2 9028 4137 antony.mcnaughton@ing.com.au www.ing.com.au

LATITUDE FINANCIAL LA TROBE FINANCIAL SERVICES AUSTRALIAN ADI

SECURITISATION PROGRAMME NAMES

LATITUDE AUSTRALIA CREDIT CARD MASTER TRUST, LATITUDE AUSTRALIA PERSONAL LOANS TRUST

USE O F SE CU RI T I SA T IO N

AUSTRALIAN ADI

SECURITISATION PROGRAMME NAME

LA TROBE FINANCIAL CAPITAL MARKETS

SECURITISATION PROGRAMME NAME

LIBERTY

U S E O F S ECURITISATION RMBS

TYPES OF SECURITISATION ISSUED

30%

PROPORTION OF OUTSTANDING 67% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$20BN+

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

88% DOMESTIC 12% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

>A$5.7BN

ABS

NUMBER OF SECURITISATIONS ISSUED

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

TOTAL VOLUME ISSUED

A$2.7BN

NUMBER OF SECURITISATIONS ISSUED

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

TOTAL VOLUME ISSUED

A$2.2BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$2.7BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

56% DOMESTIC 44% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$1.6BN

atitude Financial Services (Latitude) is a leading nonbank provider of consumer finance across Australia and New Zealand. Latitude provides sales finance, credit cards, and personal and auto loans through multiple distribution channels including in-store through its merchant partners, online, and via telephone and third-party intermediaries. Latitude has more than 2.6 million open customer accounts, A$7 billion of receivables across its portfolio and employs approximately 1,600 staff across Australia and New Zealand.

a Trobe Financial is a leading nonbank financial institution offering specialist mortgage-lending products and wealth-management solutions. The company specialises in originating, underwriting and managing granular residential- and commercialmortgage assets. Since 1952, La Trobe Financial has grown the business to a A$5 billion balance sheet with more than 280 staff and offices in Melbourne, Sydney, Shanghai and Hong Kong. La Trobe Financial has helped more than 130,000 individuals obtain mortgage finance, and has recently entered into a strategic partnership with Blackstone. ◆ please contact:

◆ please contact:

Paul Varro Treasurer +61 414 191 604 paul.varro@latitudefinancial.com Steven Mixter Head of Funding +61 406 554 035 steven.mixter@latitudefinancial.com www.latitudefinancial.com.au

USE OF SECURITISATION

TYPE OF SECURITISATION ISSUED

LIBERTY FINANCIAL

Martin Barry Chief Corporate Treasurer +61 2 8046 1502 mbarry@latrobefinancial.com.au Ryan Harkness Head of Debt Capital Markets +61 3 8610 2856 rharkness@latrobefinancial.com.au Chris Andrews Chief Investment Officer +61 3 8610 2811 candrews@latrobefinancial.com.au www.latrobefinancial.com

ABS, CMBS, RMBS

iberty Financial (Liberty) is a leading diversified-finance company in Australia and New Zealand. Its businesses include residential and commercial mortgages, motor-vehicle finance, personal loans and investments. Liberty has raised more than A$20 billion in domestic and international capital markets across 49 transactions. Since 1997, Liberty has helped more than 280,000 customers “get financial”. Liberty is also Australia’s only investment-grade rated nonbank issuer (BBB-, outlook stable by S&P Global Ratings) and one of only a few lenders with an unblemished capital-markets record with no ratings downgrades or charge-offs ever experienced by its securitisation programme.

◆ please contact:

Peter Riedel Chief Financial Officer +61 3 8635 8888 priedel@liberty.com.au www.liberty.com.au 39

ISSUER PROFILES

MACQUARIE GROUP AUSTRALIAN ADI SECURITISATION PROGRAMME NAMES

YES SMART, PUMA

acquarie Securitisation (manager of the PUMA RMBS programme) and Macquarie Securities Management (manager of the SMART auto- and equipment-lease programme) are wholly owned subsidiaries of Macquarie Bank, which is a regulated authorised deposit-taking institution and part of the Macquarie Group. Macquarie Group is a global diversified financial group providing clients with asset management and finance, banking, advisory and risk and capital solutions across debt, equity and commodities. Founded in 1969, Macquarie Group now employs more than 14,200 people in 25 countries around the globe. As at 31 December 2017, the group had total assets under management of A$485.2 billion. Macquarie Group is listed in Australia and is regulated by the Australian Prudential Regulation Authority as the owner of Macquarie Bank.

SMART PROGRAMME U S E O F SECURITISATION TYPE OF SECURITISATION ISSUED

ABS

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$27BN EQUIV.

CURRENCIES ON ISSUE

USD, AUD, EUR

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$4.5BN EQUIV.

PUMA PROGRAMME U S E O F SECURITISATION TYPE OF SECURITISATION ISSUED

PRIME RMBS

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$55BN EQUIV.

CURRENCIES ON ISSUE

AUD

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$4.9BN EQUIV.

AUSTRALIAN ADI

YES

SECURITISATION PROGRAMME NAMES

MAXIS, SMHL

USE OF SECURITISATION TYPE OF SECURITISATION RMBS ISSUED NUMBER OF 47 SECURITISATIONS ISSUED* A$45BN TOTAL VOLUME ISSUED A$29BN, TOTAL DOMESTIC VS US$10.4BN,€€2.2BN OFFSHORE ISSUANCE OUTSTANDING VOLUME A$3.9BN OF SECURITISED ISSUES *Combined Members Equity Bank Limited and historical mortgage-origination business.

E, which was rebranded from ME Bank in May 2015, was created 21 years ago to provide low-cost home loans and banking products to members of industry superannuation funds and unions. ME’s new brand represents a modern, strong, innovative and secure bank in the digital era. ME is 100% owned by 29 industry super funds, which created the bank to help all Australians get ahead. Recently, ME opened its product offering to the broader Australian population. It is committed to providing straightforward products. ME has a philosophy of supporting, educating and empowering its customers to achieve their financial objectives. ◆ please contact:

◆ please contact:

David Ziegler Division Director, Group Treasury +61 2 8237 8069 david.ziegler@macquarie.com www.macquarie.com 40 · Australian Securitisation Journal | Issue 14_2018

John Caelli Treasurer +61 3 9708 3825 john.caelli@mebank.com.au Nathan Carr Manager, Funding +61 3 9708 3572 nathan.carr@mebank.com.au Sid Mamgain Manager, Structured Finance +61 3 9708 3747 sid.mamgain@mebank.com.au www.mebank.com.au

MOTOR TRADE FINANCE AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

MYSTATE BANK NO

AUSTRALIAN ADI

MTF

SECURITISATION PROGRAMME NAME

USE O F SE CU RI T I SA T IO N TYPE OF SECURITISATION ISSUED

ABS

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

NZ$740M

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

78% DOMESTIC 22% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

NZ$440M

otor Trade Finance (MTF) was formed in 1970 to enable selected New Zealand dealers to finance sales of motor vehicles to the public. MTF is one of New Zealand’s largest motor-vehicle financiers, operating in all major centres from Kaitaia to Invercargill. MTF originators come from a network of more than 200 dealers that sell motor vehicles and motorcycles in conjunction with financial services, and 43 MTF franchises that only sell financial services. Each originator participates in the profit of the business in proportion to the volume of origination written. This provides a compelling financial interest in the quality of business originated and the ongoing success of MTF.

NATIONAL AUSTRALIA BANK YES

AUSTRALIAN ADI

YES

CONQUEST

SECURITISATION PROGRAMME NAME

NATIONAL RMBS

U S E O F S ECURITISATION TYPE OF SECURITISATION ISSUED

TYPES OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING 64% WHOLESALE FUNDING SOURCED VIA SECURITISATION

NUMBER OF SECURITISATIONS ISSUED

6 EXTERNAL RMBS

NUMBER OF SECURITISATIONS ISSUED

7 EXTERNAL RMBS

TOTAL VOLUME ISSUED

APPROX A$18BN (EXCLUDES RETAINED DEALS)

TOTAL VOLUME ISSUED

A$2.3BN

TOTAL VOLUME OF DOMESTIC ISSUES OUTSTANDING

A$4.1BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

TOTAL CROSS-BORDER TRANCHES ISSUED

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$1.1BN

PRIME RMBS

yState Bank is a wholly owned subsidiary of MyState Limited – a national diversified financialservices group headquartered in Tasmania. MyState Bank, via its own brand, has 10 branches delivering banking, lending, financial planning and insurance services to clients. The Rock, as a brand of MyState Bank, operates five branches in central Queensland delivering banking, lending and insurance services to clients. Both MyState Bank and The Rock deliver lending, as separate brands, to broker networks throughout Australia. Deposits are also sourced Australia-wide via online channels.

ational Australia Bank (NAB) is a major financial-services organisation in Australia and New Zealand with more than 30,000 people serving nine million customers at more than 900 locations in Australia, New Zealand and around the world. As Australia’s largest business bank, NAB works with small, medium and large businesses. The bank is there from the beginning to support customers through every stage of the business lifecycle. NAB funds some of the most important infrastructure in its communities – including schools, hospitals and roads – and does so in a way that is responsible, inclusive and innovative.

◆ please contact:

Jason Hughes Securitisation Manager +64 3 474 6381 jhughes@mtf.co.nz Kyle Cameron Chief Financial Officer +64 3 474 6381 kcameron@mtf.co.nz www.mtf.co.nz

USE OF SECURITISATION

◆ please contact:

Susan Castley Structured Finance Analyst +61 3 6215 9552 susan.castley@mystate.com.au www.mystate.com.au www.therock.com.au

Eva Zileli Head of Group Funding +61 3 8634 8219 eva.zileli@nab.com.au Sarah Samson Head of Securitisation Origination +61 3 8641 2997 sarah.samson@nab.com.au www.nab.com.au 41

ISSUER PROFILES

PEOPLE’S CHOICE CREDIT UNION AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

YES LIGHT

US E O F SE CU RI T IS A T IO N TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING WHOLESALE FUNDING SOURCED VIA SECURITISATION

58%

NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$3.1BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE OUTSTANDING VOLUME OF SECURITISED ISSUES

100% DOMESTIC A$1.3BN

ustralian Central Credit Union, trading as People’s Choice Credit Union (People’s Choice), is one of Australia’s largest credit unions, with more than A$10 billion of total assets under management and advice. People’s Choice has more than 360,000 members serviced through branches in South Australia, the Northern Territory, Victoria, Western Australia and the Australian Capital Territory. People’s Choice is an authorised deposit-taking institution, is subject to prudential supervision under Australia’s Banking Act, and is regulated by the Australian Prudential Regulation Authority.

◆ please contact:

Paul Farmer Manager Treasury +61 8 8305 1898 pfarmer@peopleschoicecu.com.au Heather Gale Treasurer +61 8 8305 1829 hgale@peopleschoicecu.com.au www.peopleschoicecu.com.au 42 · Australian Securitisation Journal | Issue 14_2018

PEPPER GROUP

P&N BANK

AUSTRALIAN ADI

YES

SECURITISATION PROGRAMME NAMES

PEPPER RESIDENTIAL SECURITIES (PRS), PEPPER PRIME, PEPPER I-PRIME

SECURITISATION PROGRAMME NAMES

PINNACLE

U S E O F SECURITISATION TYPE OF SECURITISATION ISSUED

RMBS

NUMBER OF SECURITISATIONS ISSUED

20 PRS (9 OUTSTANDING, 11 CALLED), 4 PEPPER PRIME (3 OUTSTANDING, 1 CALLED), 2 PEPPER I-PRIME (ALL OUTSTANDING)

TOTAL VOLUME ISSUED TOTAL DOMESTIC VS OFFSHORE SSUANCE

USE OF SECURITISATION TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING 12% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$925M

A$11.7BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

78% DOMESTIC 22% OFFSHORE*

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$406M

* Two issues in the Pepper Prime series and six issues in the PRS series have included USD tranches, with the balance of the notes in AUD.

stablished in 2001, Pepper Group (Pepper) is a leading Australianheadquartered financial-services group, with businesses in Australia, Asia and Europe. The businesses encompass lending, asset-servicing and corporate real-estate advisory. In Australia, Pepper has expanded from being a nonconforming residentialmortgage lender to also offer prime residential mortgages, auto and equipment leasing, and personal loans. Pepper is a third-party servicer and asset manager across a range of asset classes. Pepper had more than A$57 billion in assets under management as at 31 December 2017.

◆ please contact:

Todd Lawler Group Treasurer +61 2 8913 3009 tlawler@pepper.com.au Matthew O’Hare Australian Treasurer +61 2 9463 4624 mohare@pepper.com.au www.pepper.com.au

&N Bank (P&N) is Western Australia’s largest locally owned and managed bank. Operating under a customer-owned model, P&N’s primary focus is its 90,000-plus members. P&N aims to provide a genuine banking alternative for people who value competitive and convenient banking products, outstanding customer service and community spirit. With assets in excess of A$4 billion, P&N was Australia’s ninth-largest mutual bank as at February 2018. P&N is an authorised deposit-taking institution regulated to the same high standards as the major banks by the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, the Australian Transaction Reports and Analysis Centre, and the Australian Competition and Consumer Commission. ◆ please contact:

Phil Webster Treasurer +61 8 9219 7561 phil.webster@pnbank.com.au www.pnbank.com.au

REDZED LENDING SOLUTIONS AUSTRALIAN ADI SECURITISATION PROGRAMME NAME

NO REDZED

USE O F SE CU RI T I SAT IO N TYPE OF SECURITISATION ISSUED

RMBS

PROPORTION OF OUTSTANDING 50% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$1BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

85% DOMESTIC 15% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$480M

edZed Lending Solutions (RedZed) is one of Australia’s leading lenders dedicated to providing financial solutions to Australia’s under-serviced self-employed segment. The company specialises in originating, underwriting and managing residential, commercial and asset-finance loans with a focus on understanding the needs of the self-employed. Established in 2006, RedZed has helped thousands of Australian customers, originated in excess of A$2 billion in loans and generates assets in excess of A$500 million per year.

RESIMAC

SUNCORP GROUP

AUSTRALIAN ADI

YES

SECURITISATION PROGRAMME NAMES

RESIMAC PREMIER, RESIMAC BASTILLE, RESIMAC AVOCA, RESIMAC VERSAILLES

SECURITISATION PROGRAMME NAME

APOLLO

U S E O F S ECURITISATION TYPES OF SECURITISATION ISSUED

RMBS, NIM BOND

PROPORTION OF OUTSTANDING 100% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$24.7BN

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

65% DOMESTIC 35% OFFSHORE

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$7.5BN

esimac is a leading nonbank financial institution that commenced operations in 1985. The company offers a suite of prime and specialist-lending products tailored to the residential markets in Australia and New Zealand. In October 2016, Resimac merged with Homeloans, an Australian Securities Exchange-listed nonbank lender with a nationwide presence. Resimac’s capital-markets activities will continue under the various Resimac programmes, with securitisation core to its enterprise strategy. The group remains one of the most prolific Australian nonbank issuers.

◆ please contact:

Chris Wilson Chief Financial Officer +61 3 9605 3500 cwilson@redzed.com www.redzed.com

Mary Ploughman Chief Executive Officer +61 2 9248 0308 mary.ploughman@resimac.com.au Andrew Marsden General Manager, Treasury and Securitisation +61 2 9248 6507 andrew.marsden@resimac.com.au www.resimac.com.au

USE OF SECURITISATION TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING 21% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$26.5BN

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$5.3BN

uncorp Group is a top-20 Australian Securities Exchangelisted company with A$98 billion in assets. The company has evolved into a unique franchise, delivering highly valued banking, wealth and insurance products and services across Australasia. The group has approximately 13,900 employees in Australia and New Zealand and serves approximately nine million customers through its trusted brands. Suncorp Bank is one of Australia’s largest regional banks with approximately one million individual, commercial (SME) and agribusiness banking customers, primarily in Queensland. ◆ please contact:

Simon Lewis Deputy Treasurer +61 7 3362 4037 simon.lewis@suncorp.com.au Maddalena Gowing Manager, Securitisation and Covered Bonds +61 7 3362 4038 maddalena.gowing@suncorp.com.au Denise Bal Securitisation and Covered Bonds Specialist +61 7 3362 4069 denise.bal@suncorp.com.au www.suncorp.com.au 43

ISSUER PROFILES

THINK TANK GROUP AUSTRALIAN ADI

SECURITISATION PROGRAMME NAME

THINK TANK

US E O F SE CU RI T IS A T IO N TYPE OF SECURITISATION ISSUED

CMBS

PROPORTION OF OUTSTANDING 64% WHOLESALE FUNDING SOURCED VIA SECURITISATION NUMBER OF SECURITISATIONS ISSUED

TOTAL VOLUME ISSUED

A$694M

TOTAL DOMESTIC VS OFFSHORE ISSUANCE

100% DOMESTIC

OUTSTANDING VOLUME OF SECURITISED ISSUES

A$480M

hinktank Commercial Property Finance (Thinktank) is an independent nonbank financial institution specialising in the provision of commercial-property mortgage finance up to A$3 million in the Australian SME sector. Commencing in 2006, Thinktank has become a programmatic issuer supported by a national distribution network and offices in Sydney, Melbourne and Brisbane. Thinktank’s asset quality and performance is notable for conservative LVRs, low arrears and a negligible loss history. Under the continued guidance of the founders, growth in the loan portfolio has been measured and is strongly supported by long-term domestic and offshore institutional stakeholders.

◆ please contact:

Jonathan Street Chief Executive Officer +61 2 8669 5505 jstreet@thinktank.net.au www.thinktank.net.au 44 · Australian Securitisation Journal | Issue 14_2018

WESTPAC BANKING CORPORATION AUSTRALIAN ADI

YES

estpac Banking Corporation (Westpac) is Australia’s second-largest banking organisation and one of the largest banking organisations in New Zealand. The bank provides a broad range of banking and financial services in these markets including retail, business and institutional banking, and wealth-management services. As at 30 September 2017, Westpac had total assets of A$852 billion. Westpac’s ordinary shares and certain other securities are quoted on the Australian Securities Exchange and, as at 30 September 2017, the bank’s market capitalisation was A$108 billion.

RMBS PROGRAMME USE OF SECURITISATION SECURITISATION PROGRAMME NAMES

WESTPAC SECURITISATION (WST), CRUSADE RMBS

TYPE OF SECURITISATION ISSUED

PRIME RMBS

PROPORTION OF OUTSTANDING 3.4% WHOLESALE FUNDING SOURCED VIA SECURITISATION1 NUMBER OF SECURITISATIONS ISSUED TOTAL VOLUME ISSUED2 TOTAL DOMESTIC VS OFFSHORE ISSUANCE3

42 APPROX. A$78.6BN 100% DOMESTIC

OUTSTANDING VOLUME APPROX. A$5.8BN OF SECURITISED ISSUES ∗ 1 Includes RMBS and ABS. As at 30 September 2017. Residual maturity basis. 2 Approx. 50% Crusade RMBS, 50% WST RMBS. 3 Based on issues currently outstanding.

ABS PROGRAMME USE OF SECURITISATION SECURITISATION PROGRAMME NAME

CRUSADE ABS

TYPE OF SECURITISATION ISSUED

ABS

PROPORTION OF OUTSTANDING 3.4% WHOLESALE FUNDING SOURCED VIA SECURITISATION1 NUMBER OF SECURITISATIONS ISSUED TOTAL VOLUME ISSUED2 TOTAL DOMESTIC VS OFFSHORE ISSUANCE3

9 APPROX. A$9.7BN 100% DOMESTIC

OUTSTANDING VOLUME OF SECURITISED ISSUES

APPROX A$4.4BN ∗ 1. Includes RMBS and ABS. As at 30 September 2017. Residual maturity basis. 2. 100% Crusade ABS. 3. Based on issues currently outstanding.

◆ please contact:

Guy Volpicella Head of Structured Funding and Capital +61 2 8254 9261 gvolpicella@westpac.com.au www.westpac.com.au

LETâ&#x20AC;&#x2122;S GROW OUR INDUSTRY

KNOWLEDGE AND CONNECTIONS: MAKE IT HAPPEN Your competitors are members of the ASF. They are building their businesses and shaping the industry today. Make sure you are too. Find out more about membership pricing, and download an application form from: www.securitisation.com.au/membership

To discuss how membership can work for you, contact Chris Dalton. cdalton@securitisation.com.au +61 403 584 600

SURVEY

FOCUS TURNS INWARDS The Australian Securitisation Forum (ASF) released the findings of its 2018 Australian Securitisation Investor Report – compiled with assistance from Perpetual Corporate Trust (Perpetual) – in early April, to coincide with a series of roundtables hosted by Perpetual to scrutinise the findings. While investors see room for improvement, securitisation remains a sought-after investment. BY HELEN CRAIG

he study comprised a dual-phase process. Investors completed an extensive online survey across a range of issues, followed by a series of in-depth interviews to gain further insights. There were 27 investor firms involved in the first stage, and 16 investors from 12 organisations shared detail around their views. The vast majority – 84 per cent – of respondents to the online survey were portfolio or investment managers. A wide spectrum of investors were interviewed to ensure a mix of large and small firms, and both institutional and independent investor opinions were included. A key theme to emerge from the survey is that investors are focused on quality – of collateral, underwriting standards, issuers, data and deal flow. The securitisation market boasts strong performance, and investors are wary of anything that might interfere with its high standards. Elsewhere, investors are calling on issuers to improve post-deal service. They want continuous dialogue – through deal and nondeal periods – and greater transparency around secondary pricing. Meanwhile, the lack of a vibrant secondary market frustrates investors, leading them to adopt buy-andhold approaches. The survey concludes that while demand is high, interest continues to grow – despite tightening spreads and the hunt for value bringing more competition into the Australian securitisation landscape. Noting that 2017 was a record year for annual securitisation issuance, Gary Lembit, client insights manager at

46 · Australian Securitisation Journal | Issue 14_2018

Perpetual in Sydney, told a gathering in Sydney on 4 April that the overwhelming feedback from the survey was that investors desire more supply. “They continue to see value in what is on offer,” Lembit says. “Despite tightening spreads the value in securitised product relative to other asset classes and jurisdictions continues to make Australian residential mortgage-backed securities [RMBS] and asset-backed securities [ABS] an attractive investment.”

IN SHORT SUPPLY In some areas, the in-depth interviews drew out more nuance than the quantitative data. Despite 83 per cent of survey responses indicating participants are active in the secondary market for RMBS, verbal feedback suggests challenges. The problem, respondents say, is that undersupply of primary issuance is leaving paper tightly held. “It is hard to create a secondary market when there is a significant number of buy-and-hold investors,” comments Carly Prior, Sydney-based vice president at State Street Bank & Trust (State Street). “Lack of secondary is not necessarily a negative reflection on the state of the market – investors are holding the bonds because they value the assets. I think if you need to sell, you can.” Martin Saunders, senior portfolio manager at Challenger Investment Partners (Challenger) in Sydney, echoes the sentiments around domestic RMBS investors being “happy holders” of paper. He also suggests this situation may be selfperpetuating. “The structure and composition of the market is a big part of it,” he explains. “If investors had access to secondary liquidity they could turn over their stock. We have tried to transact stock on occasion and we have not received a single bid – and this is triple-A bank-issued paper. The market is more liquid at other times, but it can be sporadic.” Fund managers would like local bank intermediaries to step in to help solve the issue. They acknowledge there is little prospect of an active secondary market for junior or mezzanine tranches but believe the possibility of bank involvement improving secondary trading in senior tranches is far greater. At the moment investors say global banks rather than local ones are providing the most liquidity. “We have recently been active in secondary,” Prior says. “We assumed the buyers would be the bigger [domestic] arrangers but in the end it was global banks looking for an entry point into the market that bought large amounts of the paper.”

FOCUS ON QUALITY Another subject drawing considerable attention in the survey is quality of issuance at the transactional level. Originator and collateral quality are two of the top-five factors carrying most weight in deal assessment, and collateral performance is one of the top-five strengths of Australian RMBS. Investors attribute

CHART 1: DO YOU REQUIRE MONTHLY LOAN-LEVEL DATA?

CHART 2: IS THE MARKET BECOMING MORE OR LESS ATTRACTIVE TO YOU AS AN INVESTOR?

Yes No Not at this stage but will in future

32% 32% 36%

Continues to be attractive It’s okay Getting more attractive Getting less attractive Thinking of not investing in it

36% 36% 12% 12% 4%

S O U R C E : AUSTRAL IAN SECURITISATION FORUM , PERPETUAL CORPORATE TRUST APRI L 2018

S O U R C E : A U S T R A LIA N S E C U R IT IS AT IO N FO R U M , P E R P E T U A L C O R P O R AT E T R U S T A P R IL 2 0 1 8

collateral quality to strong underwriting, favourable market conditions and a tendency to create high-quality pools. “There have never been any losses in rated securitised notes in the Australian market,” Scott Barker, regional head, Asia Pacific at IFM Investors (IFM), told a roundtable in Melbourne on 5 April. “This reflects the quality of the underlying collateral and structures. The cultural approach of the borrower community, which wants to make mortgage payments under all but very extreme circumstances, is noteworthy. We have also had a supportive economic environment.” There is a general expectation that superior quality will linger, but investors are wary of anything that might interfere with quality issuance. There are risks – specifically where robust demand and increased competition drive flexibility in amending deal structures. Saunders says: “Coming out of the financial crisis, structures began to include call protection to ensure issuers called deals. As demand increased and more offshore investors participated, some of the protections that had built started to be tested. Call protection has been relatively stable in Australia for an extended period, but it could be a very different proposition.” The quality of available data is another talking point. Around a third of investors who responded to the survey say they require the Reserve Bank of Australia (RBA)’s loan-level data for monthly monitoring. About the same number say they do not and the same again expect to have a use for it in future (see chart 1). The statistics sum up investors’ lukewarm response to the usefulness of the loan-level data that has been provided to the market so far. Specifically, the consistency and standardisation of the – and investors’ access to it – is suboptimal. “Having to run 20 different issuers with 20 different models in 20 different formats is a lot of work,” Saunders says. “When the RBA announced the reporting, the opportunity to have a standardised set of data was very exciting. But somewhere along the way the opportunity for investors went off the rails.”

Saunders goes on to reveal that Challenger has had to sign dozens of individual nondisclosure agreements (NDAs) with issuers. He suggests this is largely manageable for the market’s bigger investors, but that the process is likely to be unwieldy for the smaller ones. “Of itself this doesn’t enable a good, level playing field for data,” Saunders concludes. “We are finally starting to get a data set that works, but access to this information is not yet equal for investors.” Prior adds that the process for accessing loan-level data, even for State Street as a large, global organisation, has been “a major issue” because the firm is unable to sign NDAs. She believes the concept of an RBA data repository is good in theory but also suggests that in practice it is only of marginal value, at least in its current form. “It is great for us to be able to drill down when we need to,” Prior adds. “But what we would like is a way to access data that is reliable and consistent for all issuers in one source. We are struggling to find this.”

VALUE REMAINS Despite spread tightening in recent years and the impact of increased competition across the capital structure, more than a third of investors continue to see value in securitised product although only a small group say it is becoming more attractive (see chart 2). Alexander Funds Management focuses on the mezzanine and junior tranches of the capital structure. Chris Black, the firm’s Melbourne-based managing director, reveals that pricing on these tranches has held its value for a long period. “We have seen parts of the triple-A piece moving quite substantially – the A2 pieces over the last 12 months might have moved in 40-50 basis points. But this hasn’t been replicated in the double- and single-B tranches.” Barker predicts continued volatility in credit spreads over the next couple of years, signalling a likelihood that pricing of higher-rated tranches will move out in time. “Wider spreads always provide the opportunity to buy at a greater 47

SURVEY

CHART 3: PREFERRED TYPE OF ISSUER TO DEAL WITH

Nonbank Major bank Mutual Nonmajor bank No preference

54% 17% 4% 4% 21%

S O URCE: AUSTRAL IAN SECURITISATI ON FORUM , PERPETUAL CORPORATE TRUST APRI L 2018

return, but I do not think this signals a quantum shift in momentum just yet.” He continues: “We think demand for mezzanine and junior notes is so strong that pricing is likely to remain at current levels. Because these tranches have not tightened they are still very good value and are probably going to be relatively immune to movements in broader credit spreads.”

ISSUER IMPRESSIONS A clear message from investors is that issuers are not consistent in their practices around maintaining dialogue with the buy side. Investors claim it is them, rather than the issuers, that instigate out-of-deal conversations, and that this is vastly different from when an issuer is actively marketing a transaction. They would prefer engagement to be both more regular and a two-way street. Nothing investors say indicates they would actively avoid any category of issuer. However, when it comes to sectoral preferences in this regard there is overwhelming support for the nonbanks (see chart 3). “Investors have different demands and desires,” Black comments. “We are very much in the camp that wants to have direct engagement with issuers on an ongoing basis. This involves site tours and the opportunity to understand processes and systems. We welcome the opportunity to see how things operate in real life rather than through the lens of a slide pack.” Not all investors have experienced the lack of communication that comes through in the survey, though. “We think we have excellent relationships with issuers and the interaction we have between deals is generally as good as when a deal is live,” Barker comments.

MORE STRUCTURAL Further investor observations about the state of the market focus on the evolution of diversity. Investors believe there has been a sea change in the composition of supply in the local market, which they believe is structural. 48 · Australian Securitisation Journal | Issue 14_2018

In 2017, nonbanks not only doubled their aggregate issuance volume in Australia but also became the largest single issuance group. “The trend seems set to continue,” Saunders adds. “A sizeable proportion of the banks’ deleveraging is being absorbed by the nonbanks. They are filling some of the gaps that were traditionally supplied by banks and we can see the potential for more securitised paper from specialist lenders.” While investors categorise additional supply as structural, they believe the entrance of a wider group of domestic and international investors is cyclical. Domestic investors believe the larger buyer base is a positive development for the local securitisation market. But they are concerned it may not be sticky. “If issuers are relying on offshore demand it is a big risk if all of a sudden these investors are not here any more,” Prior says. “Having said this, having more depth and diversity of investors is a good thing. The entrance of new Asian investors has increased credit quality as some are demanding higher levels of credit enhancement and lenders’ mortgage insurance, thereby improving the quality of pools.” Saunders points out the demand side of the equation is skewed because of the prevalence of offshore investors. “This is helping the industry, but it is cyclical,” he cautions. “We have experienced this in the past and it can change on bad news.”

RESPONSIBLE INVESTMENT Another area investors view as structurally changing is responsible lending, given a clear preference for more socially responsible investments across asset classes. This is beginning to come through in securitisation deal flow. National Australia Bank issued A$300 million (US$225.1 million) of certified green RMBS in February 2018 while FlexiGroup has issued two A$50 million tranches of certified green ABS, in April 2016 and February 2017, followed by an A$81.3 million note in May this year. Like many investment-management firms, IFM is a signatory to the United Nations principles for responsible investment. Its shareholders are 27 industry superannuation funds, and Barker says there is a desire at the superannuation level to invest responsibly. But there is also a fiduciary obligation to achieve the best returns for members. Presented with the choice between a green and a nongreen investment opportunity the bias is certainly for the former, Barker says – provided the risk-return parameters are not inferior. In the absence of a clear mandate-driven directive to buy green, the green-bond feature will not drive tighter pricing on its own. “As a ‘no-cost’ decision we will participate in the green tranche every time,” Barker says. “While we have a financial obligation to achieve the best returns, this does not mean we will buy an environmentally destructive asset just because it offers a higher return.” ■

SAVE THE DATE

AUSTRALIAN SECURITISATION 2018 The annual conference of the Australian Securitisation Forum: 26-27 November 2018, the Hilton, Sydney

If you would like to know more about the event, including sponsorship opportunities, please contact:

Jeremy Masters jmasters@kanganews.com +61 2 8256 5577