Record issuance shows growing appeal of Australian ABS

Following the introduction of the European Union’s securitisation regulations in 2013, the Australian securitisation market initially lagged behind in aligning with European investors’ standards. Over the past decade, however, the market has undergone significant changes and recent record issuance shows investors are increasingly seeing the opportunity in Australian ABS.

The Australian securitisation market reached record high issuance of A$80.3bn (€46.6bn) in 2024, reflecting strong growth across all sectors. Non-bank lenders also significantly increased RMBS issuance, benefiting from favourable market conditions as they rely heavily on securitisation for funding. Prime RMBS issuance increased notably as banks refinanced their Term Funding Facility obligations. Additionally, there has been considerable growth in auto ABS, driven by structural changes where banks stepped out due to higher capital charges, and non-bank lenders filled the gap in auto loan origination.

With the help of overseas accounts, investor demand comfortably absorbed the increased supply, highlighting the broadening investor base attracted to Australia's securitisation market. Over recent years, the market has experienced steady growth not only in issuance volumes but also through enhanced liquidity, driven by increased secondary market activity and a greater number of active counterparties. Australia's longstanding securitisation market, dating back to the 1990s, has a strong performance record with historically very low losses. The market's deep capital structures for prime RMBS to auto ABS, featuring AAA rated and mezzanine bonds, have attracted significant investor interest. In 2024, demand surged particularly from international investors, including Japan, the UK, Europe, and US hedge funds, driven by attractive relative value. Domestic bank treasuries also demonstrated increased appetite for banks’ prime RMBS. These strong technical conditions led to deals being heavily oversubscribed and frequently upsized between announcement and pricing.

After a typically quiet January, market activity picked up strongly in February, with the seven deals priced last month bringing year-to-date issuance to A$6.2bn, and another 10 in the pipeline. This momentum reflects the growing demand and gradual spread tightening across the capital structure we observed throughout 2024. Non-bank AAA rated prime RMBS offer a spread of 100bp over the one-month Australian Bank Bill Short Term Rate (BBSW) of 4.1%, equivalent to a yield of 5.5% when converted into GBP. On a currency-adjusted basis, Australian prime RMBS AAAs offer a 40bp premium over UK prime RMBS, enhancing its relative attractiveness.

Collateral performance within the Australian securitisation market has demonstrated notable resilience in the face of substantial interest rate increases totalling 430bp since 2022, particularly given its predominantly floating rate mortgage composition. Nevertheless, borrower affordability has come under pressure, leading to some deterioration in mortgage performance. Mortgage servicing costs have increased significantly, and consequently early-stage mortgage arrears (1m+) have increased moderately by approximately 0.3% and 2% respectively for the S&P prime and non-conforming RMBS index since the beginning of the tightening cycle.

Despite these headwinds, borrower behaviour has adjusted considerably, driven by a strong cultural emphasis on homeownership in Australia, supported by a resilient labour market and encouraging real wage growth of 3.7% in 2024. Consumers have reduced discretionary and non-discretionary spending, utilised savings accumulated during the Covid-19 period, worked additional hours, or secured multiple jobs to increase income streams. Borrowers have also utilised mortgage redraw facilities, enabling them to tap into previously repaid balances, thus enhancing their financial flexibility.

We are now observing signs of stabilisation in arrears and anticipate further improvement in loan performance throughout 2025, following the first rate cut of 25bp by the Reserve Bank of Australia (RBA) in February 2025, with an additional two-to-three rate cuts priced in. This should help alleviate the interest burden on borrowers, despite a modest increase in unemployment forecasted from the current 4% level.

We believe the Australian securitisation market, which currently stands at an equivalent €83.1bn in size, continues to offer attractive opportunities for investors seeking diversification, enhanced returns, and improved liquidity in a market with a robust track record. The outlook remains positive, with expectations for another year of record issuance, presenting appealing investment opportunities across AAA-rated senior tranches as well as investment grade and high yield mezzanine securities.