New Zealand Securitisation Review and Preview

NEW ZEALAND SECURITISATION REVIEW AND PREVIEW New Zealand securitisation has continued its upward trajectory in 2019, according to Deemple Budhia, Simon O’Connell and Ling Yan Pang of the Australian Securitisation Forum (ASF)’s New Zealand subcommittee. While 2017 and, to a lesser extent, 2018 were post-financial-crisis record years for term issuance in New Zealand, 2019 has materially surpassed both of them.

The 2019 record volume has coincided with the growth of nonbank lenders in the New Zealand market, including the return of some familiar names. Volume of issuance and number of issuers are clearly lower than Australia, but the six New Zealand transactions in 2019 – totalling NZ$1.4 billion (US$895.3 million) – marks a notable step forward.

The 2019 outcome marks a significant improvement on issuance to 2018 and is close to the aggregate issuance of NZ$1.5 billion for 2017-18 combined (see chart). All six transactions this year came from returning issuers, though. Term issuance over recent years has been split almost equally between credit-card asset-backed securities (ABS), auto ABS and residential mortgage-backed securities (RMBS). This trend continued in 2019. It differs from Australia, where RMBS continues to be the dominant form of term issuance.

By far the largest issuer in 2019 has been flexigroup, through its Q Card Trust. It is the only issuer to bring two

deals in the year, the second of which set a record for recent transactions after being upsized to NZ$300 million. This edged out Motor Trade Finance’s NZ$280 million Rambler transaction.

While all transactions were from repeat issuers, it has been pleasing to see a number of new investors, both domestic and offshore. In total, 18 investors participated across the six transactions, two of which were new to the New Zealand securitisation market.

Of the total issuance, 55 per cent by volume was placed domestically, 43 per cent into Australia and the balance further afield. Bank balance sheets took 22 per cent of volume with the rest purchased by real-money accounts.

Further enquiry has been received from investors that have previously not considered securitisation. This can be attributed largely to the product’s attractive risk-return profile and performance over the last 10 years, and the prospect of issuance of the Reserve Bank of New Zealand (RBNZ)’s residential mortgage obligation (RMO) securitised asset class in the near future.

In response to increased enquiry, the ASF has run a number of courses. These have been well attended by a variety of market participants including issuers, investors and government agencies.

Aside from capital-markets issuance, 2018-19 has seen a number of new warehouse facilities established by lenders in New Zealand and existing warehouses increased in size to a level that could permit bond issuance in the near future. New sponsors include Harmoney, Pepper, Bluestone, Prospa and CFML. All these new facilities bode well for the future publicissuance pipeline.

REGULATORY CHANGES There have also been important regulatory changes and proposed changes, particularly for banks, over the past few

NEW ZEALAND SECURITISATION ISSUANCE VOLUME

Eclipx Resimac

1.600

Flexigroup* MTF Avanti Latitude

1.400

1.200

1.000

200

250

VOLUME (NZ$M)

800 600 400 200 0

2017 2018 2019 YTD 200 200 150 280 453 250 220 209 250 224 *Two deals in each of 2017 and 2019.

years – and these have buoyed nonbank lender interest in New Zealand securitisation.

Nonbank lenders have seen this as an opportunity to enter or grow their presence in the New Zealand market. One example has been the RBNZ’s review of the capital-adequacy framework for banks, which began in May 2017 and should be finalised by December 2019.

Among other changes, the RBNZ has signalled that there will be a material increase in the level of capital required to be held by banks – including up to 16 per cent tier-one capital – while existing risk weighting for different types of assets will be amended.

While the final outcome of the review is unknown, if the changes signalled by the RBNZ are implemented nonbank lenders may have new opportunities to grow their New Zealand businesses. Whether this view is correct and how it might develop is uncertain, but even very small changes within the banks could provide growth opportunities for the nonbank sector.

According to the reserve bank, aggregate housing loans funded by nonbank lenders increased by 50 per cent between August 2017 and August 2019. While the increase sounds impressive, at only NZ$2.9 billion this represents approximately 1.4 per cent of the total New Zealand mortgage lending market. By contrast, NZ$5.6 billion of the consumerfinance sector is funded by nonbank lenders representing approximately one-third of that market.

One the other side of the coin, like Australia, there has been increased focus on the conduct and culture of the financial-services sector. One output of this increased scrutiny is the Credit Contracts Legislation Amendment Bill, which proposes significant changes to New Zealand’s consumer-credit regime. These include the imposition of a due-diligence duty on directors and senior managers to comply with the Credit Contracts and Consumer Finance Act 2003 – including the principles-based lender responsibilities. This will affect all lenders in the New Zealand market so is unlikely to shift the composition of lending activity. But it will increase the compliance burden on lenders.

The bill is currently anticipated to pass this year and come into effect from March 2020. It is one of a number of changes proposed by government, including a conduct-licensing regime for banks, insurers and nonbank deposit takers, and a review of the Reserve Bank of New Zealand Act 1989. Taken together, these changes herald a period of significant regulatory transition and adaptation for lenders. In addition to these, the revised financial-advisers regime was passed in April 2019 with key provisions coming into force from mid 2020.

RMO UPDATE Since 2017, the RBNZ has been consulting on the RMO standard. Based on the last consultation paper, issued in

November 2018, the RMO will essentially be a form of highgrade RMBS as it includes a prescriptive capital structure, eligibility criteria and portfolio limits to enhance the credit quality of the underlying pool.

The reserve bank’s view is that stricter criteria will result in a more marketable, high-quality instrument which may assist in developing a liquid market for these repo-eligible securities. The RBNZ has been engaging with market participants to revise the RMO standard and the loan-level data template. The template is now substantively agreed. The final template will be published with the final RMO standard, which is expected to be by the end of this year.

How regularly banks will issue RMOs is an open question as there is currently no external RMBS issuance from the banks. If the final standard includes a capital-relief option – as is the case in Australia – there would be an additional incentive, over and above being able to use the instrument for liquidity purposes, for banks regularly to issue RMO securities. This would follow the pattern established in Australia. However, the November 2018 consultation paper did not contemplate such an option.

In any event, RMO issuance by the banks will be significant for the New Zealand market and regular RMO supply should assist in further developing the New Zealand term-issuance market as a whole.

LOOKING AHEAD Since the financial crisis, the New Zealand securitisation

market has been dominated by warehouse funding. This has again been the case in 2019, with a number of new and returning nonbank lenders establishing warehouse facilities. As existing warehouse securitisations grow, the assets may

contribute to future term issuance.

Given the rapid changes in regulatory landscape, the next 12 months is likely to present new opportunities in the securitisation space. Increasing the diversity of issuers may

help overcome the sporadic nature of domestic deal flow to date, incentivising New Zealand and offshore investors to familiarise themselves with New Zealand securitisations.

Overall, the future is looking bright for the New Zealand

securitisation industry. ■

New Zealand market subcommittee Simon O’Connell, Deemple Budhia and Ling Yan Pang are members of the New Zealand market subcommittee of the Australian Securitisation Forum. The subcommitee was established in 2015 with a view to establishing an advocacy group for securitisation in New Zealand. The fundamental objectives of the subcommittee include education, networking, industry liaison and advocacy for securitisation as a debt capital markets tool. The subcommittee is chaired by Simon O’Connell and comprises market participants including issuers, arrangers, investors, lawyers and trustees. Further information can be found at https://www.securitisation.com. au/whatwedo_newzealand_market .