RMBS rush: Lenders gear up for more monster funding deals

The nation’s non-bank lenders are preparing for a new round of monster funding deals, even after the sector has raised billions of dollars just in the past week.

Non-bank lenders are rushing to issue mortgage-backed bonds amid the booming housing market. Picture: NCA NewsWire / Gaye Gerard

The nation’s non-bank lenders are preparing for a new round of monster funding deals, even after the sector has raised billions of dollars just in the past week.

Amid the heady combination of a booming housing market and an insatiable appetite from large investors, non-bank lenders have raised more than $5bn through residential mortgage-backed securities (RMBS) in just over a week, including a record-breaking $2bn bond from Firstmac.

While most of these lenders typically do a couple of issuances a year, all signs are pointing to a bumper 2021, with even bigger deals likely before the year is out.

Indeed, the sector is on track for having one its best years for fundraising since the global financial crisis, where at its peak more than $55bn flowed into RMBS deals.

Under RMBS deals, mortgages are packaged up for big investors, rather than being held on bank balance sheets.

“Our normal annual funding requirement is around $3bn. We’ve already done $3bn and we’re in May,” Firstmac chief financial officer James Austin told The Australian.

The Brisbane-based lender raised $1bn earlier this year and then followed it up with a $2bn mortgage-backed bond, the biggest-ever issued by an Australian non-bank.

Originally intending to raise around $1bn in the latest issue, Firstmac supersized the deal once it saw the volume of appetite from investors both at home and overseas.

Mr Austin expects it will be back in the market in just a few months.

“We settled $500m in home loans last month. So $2bn is only four months of funding. While that continues, we’ll have appetite to issue new bonds.”

In a week where there were six RMBS transactions in the market at the same time, the demand surprised on the upside.

Demand for home loans has also pushed non-bank lenders back to funders.

“That’s pretty much unheard of. It’s more than I can ever recall seeing (in one week). And it probably made me a bit nervous that there was going to be too much for the market to absorb, but the market actually absorbed it quite well,” Mr Austin said.

As the housing market powers ahead, with surging demand for mortgages, non-bank lenders say borrowers are increasingly attracted to the competitiveness of their variable rates, as well as the faster loan application turnaround they can offer compared to some of the big banks.

“We’ve also seen the dynamic of the major banks focusing on that super-prime borrower, the very vanilla customer. That’s one of the after-effects of the Royal Commission,” La Trobe Financial chief financial officer Martin Barry said.

Blackstone-owned La Trobe last week priced a $1.25bn issue, with pricing – calculated in terms of yield over bank bill swap rate – being among the lowest since the global financial crisis.

On the investor side, meanwhile, the absence of the major banks issuing mortgage-backed bonds due to the Reserve Bank’s term funding facility has left a big gap in the market that the non-banks are more than happy to capitalise on.

“The non-banks have been very active in issuing bonds, and because there‘s not much supply at the moment, with the banks not issuing (mortgage-backed bonds), investors are turning to that non-bank paper and seeing it’s very high quality. They like the asset, and the returns,” Mr Barry said.

More than 70 per cent of La Trobe’s issue was placed with international investors.

Australia is a standout for fixed-income investors, in part due to its success in handling the COVID-19 pandemic, according to Mr Barry.

“Australian borrowers have a very good track record, so there’s a long history of really good performance of Australian mortgage borrowers. As well as the high quality of the assets, the Australian economy relatively has done very well compared to many other countries around the world.

“We’ve managed COVID, very differently from other countries, so we’re getting the economic benefits of that. And the return profile, the rate of return investors can get from Australian RMBS at the moment, on a relative basis, is quite good.”

La Trobe’s $1.25bn issue was its first in 2021, so it may well stick with two jumbo issuances for the year.

“I think all of the non-banks will be looking at their issuance plans and looking if they can do more. It might be through private rather than public transactions, and I think there’s appetite from investors for both,” Mr Barry said.

The pricing reflects the low interest rate environment as well as the supply/demand imbalance, he added.

Pepper Money chief executive Mario Rehayem.

Pepper Money CEO Mario Rehayem also pointed to the attractive yield on offer for global investors.

“The market has seen unprecedented levels of demand in regards to RMBS and asset-backed security paper, and that’s because businesses like ours that do fund through the debt capital markets are going to provide yield that is appealing for investors not only in Australia but all around the world.

“Every investor around the world has the same appetite at the moment, and that is, a good long track record of strong credit performance mixed with ability to generate good yield. It’s appealing, and that’s what they are gravitating to,” he said.

Pepper is due to list on the ASX later this month and last week boosted the size of its initial share offer by $50m to $500m. Ahead of the biggest IPO of the year to date, Mr ­Rehayem said the company was “at the start of a very long freeway’’.

As the sun shines on the non-banks, Blackstone-backed La Trobe is also considering its options, with a $2bn-plus sale or IPO on the cards.

Goldman Sachs is currently leading a review of its $12bn lending business.

The gap left by the banks in issuing paper, meanwhile, is unlikely to be filled when the RBA’s term funding facility expires at the end of June, according to Mr Austin.

“A lot of the banks will be drawing down their full amounts just before the end of June, which means they’ll have plenty of money for the remainder of this calendar year.

“So I think not much changes for the rest of this year, but then into next year I suspect we may see regulators come in with macroprudential controls.”

Additional reporting; Cameron England