Diversity outstrips volume in New Zealand securitisation
Market participants speaking at the second-ever New Zealand Securitisation Forum reflected on the gains the market has made in the last decade. While collateral diversity has increased, issuance volume and frequency lags as regulatory uncertainty and the economic climate continue to create headwinds.
Kathryn Lee Senior Staff Writer KANGANEWS
A pattern has emerged in New Zealand securitisation issuance since the market boom of 2021. Annual volume of NZ$1-2 billion (US$608.5 million – US$1.2 billion) gets priced, with nonmortgage asset-backed securities (ABS) providing most of the flow since 2023.
Residential mortgage-backed securities (RMBS) issuance is low – there was only one in 2023, and none in 2024 to date – but 2023 brought three new issuers to the ABS market: Harmoney and Oxford Finance with first-time public securitisation deals and Avanti Finance adding its auto programme to its historical RMBS issuance.
In May, the Australian Securitisation Forum (ASF) hosted its second annual New Zealand market event, in Auckland. Martin Jaques, head of securitisation and covered bond strategy at Westpac, told delegates New Zealand’s nonbanks have experienced similar challenges to their Australian counterparts in mortgage origination, while other lending sectors have been more fruitful.
“There was only one RMBS in 2023, but unsecured receivables and autos have seen continued growth of new issuers and regularity. I believe conditions will most likely provide for the ABS sector to see more supply this year,” Jacques said.
Supply peaked in 2021, when more than NZ$2.5 billion of new securitisation issuance came to market. But the sector has not yet benefited from the virtuous circle gains of becoming a reliable source of supply for local or international investors.
Simon O’Connell, Westpac’s executive director and head of structured finance, explained: “There were only one or two deals a year in the period after the financial crisis. It has always been a chicken and egg scenario: we need issuance to get investors, but no fund manager is going to spend money on a ‘securitisation guru’ analyst for one deal every year. We need issuance, but to have issuance we need investors.”
Supply fundamentals should help, however. The New Zealand market has not been overwhelmed with high-quality credit supply and institutional investors are clearly interested in exploring diversification options. Meanwhile, there are also positive signs of interest from international investors – especially from Australia – including in ways that should help enhance market functionality without necessarily immediately adding to public deal flow.
Paulina Ting, senior portfolio manager at Challenger Investment Management, said the fund manager has been investing in New Zealand since 2014. “We view New Zealand as a really interesting jurisdiction,” she said. “It is very similar to Australia, in many ways – it is an open, democratic country, and a natural extension of what we do.”
Interest extends to private warehousing, noted Simon Petris, executive director and cofounder of Revolution Asset Management. Petris said the private credit fund’s first investment was in a New Zealand credit card ABS deal. In the time since, however, it has focused on a warehousing strategy. “The public market was useful when we were growing, but as we got larger the scale private warehouses offer became valuable,” he said.
Ting said Challenger also takes part in New Zealand securitisation warehousing – where it sees its role as a facilitator of credit throughout the issuer’s journey. “The benefit of having a large balance sheet is that we can warehouse assets through the dialogue stage and invest in rated bonds as issuers term out in capital markets. We have done this successfully with a number of issuers in New Zealand,” she said.
Challenger has a flexible time horizon, Ting continued – it is happy to be involved over roughly two years of the warehouse to capital markets journey. The asset manager views warehouse investments as a method to transition to longer-term funding when an issuer’s capital needs grow beyond what can be provided by shorter-term warehouse funding.
There has also been increased interest in whole loan sales as an alternative form of funding and capital, Ting continued. “Treasurers value the diversification and flexibility whole loan sales provide. It can speed up growth in existing products and allows issuers to increase their product suite beyond those that neatly fit into securitisation structures,” she said.
The conversation about whole loan sales has become “more interesting” in an environment in which capital is expensive, Ting told delegates. Challenger has invested in New Zealand whole loan sales since 2017 and even longer in Australia. “We historically focused on RMBS loans, and on a risk-adjusted basis residential loans in New Zealand present a really good return profile given the capital treatment we can provide,” she revealed. “We are also looking at other asset classes, such as consumer secured and unsecured loans.”
A lack of issuance does, however, make participation in primary flow more difficult than it could be. From a price discovery perspective, Ting said Challenger looks to Australia for comps – particularly issuers that operate in both jurisdictions. “With fewer deals in New Zealand, bonds are less liquid – and this adds a premium. However, we believe this pricing differential will compress as the market grows,” she added.
PROGRAMME BUILDING
The New Zealand regulatory, economic and funding landscape has clearly been less conducive to nonbank lender growth than Australia. While the former is not showing signs of an imminent thaw (see box) and the second will only change cyclically, market participants say issuers and potential issuers of securitisation structures in New Zealand can optimise their path to market.
Rory Watson, head of debt market portfolios and underwriting at National Australia Bank, emphasised the importance of investor engagement even if term issuance is not a near-term goal. “For treasurers and CFOs in this space, the number one game is to grow the funding base. From this perspective, consistency is key. It may not be possible to issue annually, and not doing so might mean paying undrawn fees in a warehouse. But there is an example from Australia: there is consistent issuance there and we meet most issuers annually – even if we might not invest in every deal. I never tend to seek out a meeting with an issuer I haven’t seen in a while, but if an issuer approaches us, we will never say no.”
Caroline Dunlop, Avanti Finance’s head of funding, said it is important that investors and issuers both have reasonable expectations about funding and issuance plans. “There are conversations about flow expectations on either side – including what inflows investors have and the particular areas or businesses they want to deploy these in. Early engagement is important for both sides. We need to be aware of what everyone is doing,” she said.
Regulatory wheels continue to turn
What future regulation of New Zealand’s securitisation sector could look like is weighing on the minds of market participants. The general feeling is that the regime does not provide as much natural space for nonbank lenders as the Australian market, while all types of lenders and capital market issuers are also being forced to adapt to an ongoing rapid pace of change.
Fraser Wilson, head of treasury at Motor Trade Finance, argued that the local regulatory landscape “has been quite volatile for the last few years”. The biggest change, he suggested, has been the introduction of the Credit Contracts and Consumer Finance Act. But there have also been revised bank capital requirements, a liquidity review, repo-eligibility updates, the introduction of a clean car rebate scheme, a review of the nonbank deposit-takers regime, and political uncertainty. “It is a lot of change for a small country,” Wilson told forum delegates.
Regulatory uncertainty can be a handicap to capital allocation, while consistency in how regulatory evolution plays out will be important. “Ourselves and the originators we work with invest a lot of time, as well as investing a portion of capital toward supporting certain strategies. When the environment or strategies are possibly changing, it’s frustrating all around,” said Simon Petris, executive director and cofounder of Revolution Asset Management.
Issuers say their best course of action is to move based on outcomes rather than speculation. Caroline Dunlop, head of funding at Avanti Finance, said: “There is a lot of promise about what regulatory change will be, but we need to find out what it is going to be in order to take any action. Regulatory requirements aren’t something to get in the way: they are a social licence that we need. We just need to know what a change will be, and we will accommodate it.”
Simon Pannett, investment analyst at Harbour Asset Management, said regulation should be expected and embraced. “The provision of credit is hugely important to the economy and it is natural that the regulatory pendulum is going to swing,” he commented.
In fact, argued Rory Watson, head of debt market portfolios and underwriting at National Australia Bank, updating regulatory expectations may prove to be beneficial in the long run. “There is a really mature industry in Australia and, while this is not to say New Zealand has an immature industry, we need to focus on developing this sector,” he said. “It provides credit to a part of the economy that might not get it as easily from the banks, and it’s a great product as well.”
Elly Ko, head of funding, consumer at hummgroup, added: “Our investors do this well, and it’s one of the reasons why, despite the conditions in the last year, we have been able to be confident to go to market. We go to investors ahead of time to get their views on what they see and any changes we need to make.”
Jacques remarked that increased public disclosure on structuring since 2016 has helped the Australian market. “More granular tranching from triple-A down meant we got more price disclosure on those tranches,” he said. “To go from a market with one or two subordinated tranches with pricing undisclosed to having tranching at every rating band and more public disclosure of pricing meant the asset class could attract new investors – because buyers can see spreads and do relative-value calculations. It gave investors the opportunity to be involved.”
He continued: “Issuance begets issuance. More volume attracts more investors who will apply resources to look at the market.”
In this context, growth in other types of ABS issuance is positive. “Part of the driver in the Australian auto sector is that offshore investors can look at it. There are legal and structural differences, but the hurdles are not as great as RMBS, where a lot of preliminary work is needed to get across the entire housing market,” Jacques commented.
Overall, New Zealand market participants seem to be acknowledging that there is no silver bullet for significantly increased securitisation supply. A reasonable goal, therefore, is to maximise the functionality of what is available to the range of issuers and investors that are active, with the goal of supporting new entrants – lenders and investors – whatever stage of scale or range of activities they have to offer.
Promoting the nonbank lender segment might be the biggest difference-maker, though. Mark De Ree, head of treasury at UDC Finance, noted the New Zealand market is “well covered” in its product mix but argued that its scale needs improvement. “We either need more issuers to come in and to do more regular deals, or we need existing issuers to take more lending market share from the banks,” he said.
Dunlop added: “It is about encouraging more issuers to come to market – such as Harmoney last year – for more issuers to issue more products and for all of us to continue to issue,” she said.
A positive note came from Duncan Gross, Harmoney’s group treasurer – who said scale will likely follow technological advancement. “There are light years of difference between the way we assess borrowers’ creditworthiness today compared with 10-30 years ago,” he said. “There is much more data available. Positive reporting came in several years ago and open banking is on the way; the data mining tools we have available and the way we can analyse bank transaction data levels the playing field for banks and nonbanks. Overall, I see this as a big positive for the industry and consumers.”
For the time being, though, growth expectations are reserved. “The rest of this year will be subdued. We are still in an environment where costs are squeezed, and for as long as the rhetoric remains that interest rate cuts are not coming in a hurry, no-one is seeing the light at the end of the tunnel,” De Ree told conference delegates.
Dunlop added that the outlook remains challenging for consumer and commercial borrowers alike. “It will be a tough year, and this will be reflected in volume,” she said. “I suspect we are all declining applications in greater numbers due to borrowers not being able to meet our affordability metrics. Ultimately, though, it is good not to be getting people into debt they cannot manage.”
In this environment, Gross said it is not a time to chase growth or for investors to demand it. Rather, Harmoney is focusing on its portfolio performance. “Our priority is managing the business and profitability so we are still here next year and the year after,” he explained.
