Larger top tranche improves RedZed’s funding cost from latest RMBS

According to Will Gillespie, director, securitisation originations at National Australia Bank (NAB) in Sydney – RedZed’s arranger – this structural enhancement made the all-in cost of funds to RedZed roughly 25 basis points lower in the latest deal than 2022-3. This is despite an identical margin – of 175 basis points over BBSW – on the A1 notes.

RedZed followed a part-private approach to its latest deal – having privately placed its 2023-1 residential mortgage-backed securities (RMBS) deal earlier this year. Following reverse enquiry, RedZed pre-placed the Class A and B notes in the latest deal before the deal team went to market requesting expressions of interest for the lower-rated notes.

The investment grade mezzanine tranches also attracted notable domestic and international support, deal sources say, with the level of demand for these notes enabling RedZed to achieve tightening of 5 basis points beyond the tight end of the launch range.

In the end, the C notes were 3.2 times oversubscribed, D notes 2.7 times and E notes 1.2 times, while the F notes were fully covered. “The investment grade mezzanine notes were really well supported and I'm sure we would have had a similar experience if we had offered the class B tranche,” Gillespie adds.

RedZed conducted European investor engagement around the Global ABS event in Barcelona in mid-June and the preceding Australian Securitisation Forum event in London. As a result, the transaction attracted some new accounts from the UK and Europe.

Rick Li, treasurer at RedZed in Sydney, tells KangaNews: “It was fantastic to witness new offshore participants entering the programme. Their participation is indicative of the messages we received in Barcelona, which was that offshore investors are much more open to looking at Australian RMBS following their absence at the beginning of the year.”

While RedZed’s latest deal exemplifies constructive RMBS market conditions, it also reveals that there is still a degree of investor caution at the lower levels of the capital stack. This is not new, Li adds: subordinated notes have been harder to place for at least the past year.

“There wasn’t necessarily the same level of euphoria for the E and F notes as there was for the others – we did not tighten from our initial levels,” adds Gillespie. “While it is a somewhat better situation than what we were facing in April-May, where there was limited demand for the F notes, they still require some form of targeted investor engagement.”

With pricing only just starting to tighten, Li suggests relative value – and the robustness of the sector – continues to be a key supporter of RMBS demand across deal structures.

Li suggests price tightening should come over time as deal flow allows issuers to achieve new marks. Fundamentally, he argues, less supply of RMBS – caused by a more challenging loan origination market – combined with ongoing demand for quality assets in a relatively stable jurisdiction should push spreads in a positive direction for issuers.

This means that RedZed will have further headroom for origination, Li continues. “When spreads start to tighten, it means our cost of funds begin to improve and therefore we can better serve the needs of our customers.”