6 minute read
THE STATE OF THE MARKET
On February 11 2020 the treasurer of a NeoBank – an online only bank – told us, “the biggest existential threat for securitisation is still around the global financial system and liquidity. For example the potential for pandemics and the possible flow on impacts to the economy.”
Just a month later and we were putting the theory to the test. At the time it was the last thing on the mind of industry participants who overwhelmingly spoke in positive terms about the health of the industry.
On February 6, the treasurer of one of our most established non-bank lenders said “It’s going quite well – almost gangbusters I think!” when talking about the securitisation industry
So, on the one hand, we had many thought leaders expressing a positive outlook for the securitisation industry. And on the other, a global crisis that threatened to bring whole economies to their knees. We figured the best thing to do would be to pause and take stock.
The insight we’d captured was an accurate reflection of their beliefs in February, yet their relevance would be fully tested in the months that followed. We decided to check in on the true impact of COVID-19 by going back out to the industry and asking how the pandemic had impacted what looked likely to be a cracker of a year for securitisation.
But before we look at what they said, let’s return to January and early February 2020 and see what the industry was telling us about securitisation, innovation and the emergence of FinTechs, NeoBanks and other new players.
A HEALTHY INDUSTRY AT THE BEGINNING OF 2020
The following comment sums up what many industry participants were saying about securitisation coming into the new decade.
“We’ve seen some really positive developments in the securitisation industry in Australia of late. We’re seeing issuance volumes getting back up to levels that we saw preGFC, which is very encouraging. We’re seeing more issuers look to issue offshore as well. And we’re seeing new issuers come to market too, so, that’s all been very encouraging.”
Warehouse
Looking through more comments about the industry at the start of the year, many were similar in sentiment. There was a range of indicators participants felt were strong signs of a healthy industry.
The primary factors participants believe make the industry healthy were:
AN INCREASE IN PARTICIPATION IN THE INDUSTRY
A GROWING BASE OF GLOBAL INVESTORS AND THE RETURN OF OVERSEAS BASED WAREHOUSES
LIQUIDITY AND CREDIT VOLUMES
DIVERSITY OF ASSET CLASSES
VALUE
All participants have taken an active interest in the emergence of new participants, whether they be issuers, investors or warehouses. There are divergent views on whether the majority of new entrants will be successful, but the increase in the level of activity they are generating was welcomed.
The growth in Asset Backed Securities (ABS) and the increasing diversity of asset classes was perceived to have a positive impact on value and the ability to attract overseas investors.
“I think the industry I think the industry is in very good shape, more than 10 years after the GFC. than 10 years post GFC. Volumes have been increasing, the performance of collateral’s been very good. We’ve got an expanding universe of investors. We’ve got a number of new issuers, particularly in the FinTech space and some innovation and new asset classes, so all the signs are pretty positive.”
Intermediary
A strong sense that volumes are increasing was evident despite being so early in the year. Participants felt the year had begun with a flurry of activity that was much more than the presence of new issuers.
The increase in ABS activity and the diversity of assets within ABS was seen as a bright spot for many. In recent years when talking to investors and issuers, the lack of ABS and the relatively small size of ABS deals was seen as a hindrance to the growth of securitisation. The emergence of FinTechs and NeoBanks, often in the ABS sector, has captured the market’s imagination and raised the prospect that new value opportunities will emerge.
“I see that in the non-bank space on the funding side of the world, the competition is not other non-banks. The competition is other asset classes and it seems to me that our world is becoming somewhat good value.” Fintech
Non-bank lender
Underpinning the confidence in the market is the belief that credit quality continues to be a strong positive feature of the Australian market.
“In Australia it’s always been a reasonably healthy market. I don’t think we’ve written any forms of assets that have been too far to the right on the risk spectrum whereby it’s caused problems. It does exist but I think it exists in the banking system, not in the securitised markets and not to say that we’d get there, but I don’t think the Australian market really went that far down the rabbit hole because there was enough of the good stuff around.” Fintech
Investor
We believe, despite the uncertainty created by COVID-19 there is a positive momentum within the securitisation industry that is well-placed to weather the storm.
We went back to the industry in August 2020 to investigate how the positive signs of a healthy industry might be affected by the COVID-19 crisis. Here are some of their thoughts.
Participants have been pleasantly surprised with how things have gone but there is an underlying note of caution. There is widespread appreciation of the positive impact of the AOFM and the fact that it has allowed the industry to keep moving. Equally, there is concern that the stimulus will only delay a more severe downturn down the track.
“I'd say resilient. I think there’s been plenty of support for the industry whether its government support and even in a lot of circumstances investor support.” Fintech
“I’ve probably been surprised that loan deferral and impairment haven’t been higher. People have generally, notwithstanding the difficulties their businesses are facing, made good attempts to repay their loans. Government stimulus has been a big factor in that.” Fintech
“The AOFM has supported our warehouse in a way that we would not have been able to get from a private financier.” Fintech
There has been a noticeable shift in pricing which is having most impact on newer players.
“From a pricing perspective we don’t have as much leverage with investors who are interested in deploying capital and supporting programs that are younger and definitely their rates are blowing out particularly in the mez.” Fintech
Investors are saying the pricing reflects the impact of the pandemic on liquidity.
“Most of the liquidity associated with the securities is probably no longer there because the underlying nature of the securities in securitisation is already not very liquid and with the crisis that makes it even harder. When the market becomes illiquid it’s just too hard to know what the value is.” Investor
There are lingering doubts about the long term effects COVID-19 will have on the economy but most are pleased with the state of the play as it stands.
“The COVID shock was indiscriminate in who it affected and I expected to see huge amounts of distress and hardship in our book as everywhere else but what has been surprising has been the size and the hard hitting nature of the government response to the problem which has meant borrowers have been able to struggle through.” Fintech
Despite the caution and the uncertainty participants remain positive about the future. Many have quickly responded to the need to adapt, whether that has involved shifting their focus to new market segments or re-assessing the types of risk they are prepared to accept.
