The Australian Prudential Regulation Authority (Apra) has
announced details of its much-anticipated securitisation
reforms. The market agrees the prudential changes are needed,
but there is concern about a proposed two-tranche
October 22 speech at the Australian Securitisation Forum,
Apras executive general manager of policy, research and
statistics Charles Littrell set out the proposed reforms, which
will likely be expanded upon in an upcoming consultation
The reforms have become particularly urgent as more
instruments notably securitisation and covered bonds
compete for the same investors.
Chris Dalton, CEO of the Australian Securitisation Forum,
told IFLR that the industry welcomes the review of
prudential securitisation standards.
This has been overdue because the framework in place
hasnt moved with the market, especially after changes
post-financial crisis, he said. Were looking
forward to a standard that strikes a simple, more
principle-based approach to securitisation.
Many of the reforms were prompted by Apras
observations during the financial crisis. In his October 22
presentation, Littrell noted the following concerns: criticisms
of the originate-to-distribute model; the possibility of a
sudden closure of securitisation markets; and, lenders relying
too heavily on funding through securitisation.
Market participants agree that the most important proposal
laid out by Littrell is the limitation of securitisation
structures to two tranches: one senior tranche and one junior
tranche. The senior A tranche will comprise 90% of a typical
home-loan securitisation and will be AAA rated.
While Apra will allow authorised deposit-taking institutions
(ADIs) to trade in their own A notes, the B note will be a
funding-only securitisation designed to be held by the
originator. Although originators may sell these notes for
funding reasons, they must retain 20% to comply with a
so-called skin in the game requirement.
Moreover, the junior tranche, or B note, is unlikely to be
rated. Littrell said that they are meant for investors who have
built up serious credit analytics capacity and can rely on
their own analysis. Potential investors include insurance
companies and superannuation funds.
ADIs will be strongly discouraged from holding another
originators B notes, and the proposed penalty of is a
100% equity deduction for any B-note holding.
But Herbert Smith Freehills executive counsel Vinh Huynh
said that restricting ADIs to a two-tranche structure will
limit their ability to spread risk according to investors
Dalton agreed that allowing ADIs to take only one junior
tranche is a concern, but added that Apra hasnt yet
drafted its white paper.
We hope in the process that Apra is able to understand
that having multiple tranches for the junior piece in
securitisation transactions is primarily done for the purpose
of attracting specific investors that have different and
specific investment requirements, he said.
The tranche compression guidelines could also change the
rest of the market, although the rules are only intended to
apply to Apra-regulated ADIs. Regardless Huynh said it will be
interesting to see what effect this has on non-Apra regulated
Securitisation as a funding-only
Littrells speech has clarified Apras oft-queried
stance on the use of securitisation as a funding technique.
This process has not been readily accepted by Apra to date,
said Lachlan Roots, partner at Herbert Smith Freehills. But
now, he said, counsel have some guidance on the process being
formally included and possible prudential and capital
But Apra is still considering how to ensure liquidity is
properly managed in a funding-only situation. Littrell named
three features, including a limit on the proportion of an
ADIs balance sheet that may be pledged for securitisation
purposes to prevent the emergence of the originate to
Competition with covered bonds
Roots said that although securitisation is still a standard
funding source for ADIs, the cost of issuing securitised debt
remains reasonably expensive.
Instead, ADIs can now issue covered bonds, which can compete
in a similar investor space and means less issuance of
residential mortgage-backed securities (RMBS), he said.
Parliament passed covered bond legislation in October 2011
and a market for the instrument has developed in the last 12
months. Although Dalton agreed that covered bonds have had an
impact on the appetite and amount of RMBS issued in Australia
this year, he said the margins have come in.
Investors may be interested in the higher-yielding
senior tranches of RMBS compared to the yield in covered
bonds, he said.
He added that there is a distinct possibility for RMBS
issuance to go up in the next 9 to 12 months, as there is more
stability in the international credit markets.
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