By Partner Nicky Lester, Senior Associate Nick Church and Lawyer Daniel MacPherson
The Australian securitisation market was arguably more resilient than many during the GFC. However, certain regulatory and structural features of the Australian securitisation market have hampered its growth and the ability of Australian issuers to tap the full potential of investor demand.
On 29 April 2014, APRA released a discussion paper entitled Simplifying the prudential approach to securitisation, which outlined APRA's proposed reform for a more simplified regulatory framework. At the same time, a number of major Australian banks and the Australian Securitisation Forum have made submissions to the Financial System Inquiry in respect of securitisation regulation in Australia.
Set out below are some of the structural changes we may see in Australian securitisation deals following the finalisation of the Financial System Inquiry and the consultation process outlined in APRA's discussion paper.
Presently in Australia, securitised notes are generally issued using a 'closed pool' structure, under which a tranche of notes is backed by a closed pool of receivables. Now with APRA's support, it appears to be only a matter of time before Australian deals align with the international practice of using master trust (or 'revolving securitisation') structures.
Under a master trust structure, different tranches of notes are issued through a single trust, all of which are collateralised by a shared pool of receivables. This gives issuers more flexibility, allowing them to issue multiple tranches with different issue dates, interest rates and maturity dates under the same documentation suite.
Key advantages that a master trust structure offers include:
- Broadening the range of collateral that can feasibly be securitised, including assets such as credit card receivables and small business loans.
- Expanding the types of note products that can be offered, including, for example, 'soft bullet' and scheduled amortisation notes. Both of these products provide investors with greater certainty about when they are likely to be repaid.
- The inclusion of a 'seller share', whereby the seller retains a loss absorption share as an investor in the securitisation. This helps to manage volatility in prepayment, and also facilitates the securitisation of short-dated receivables.
Master trust structures will provide Australian issuers with greater efficiency and flexibility in matching investor preferences and accessing international markets.
The current regime that provides sellers with the option of re-purchasing receivables only once the pool has amortised by more than 90 per cent does not allow issuers to meet the investor demand for date-based calls. APRA has expressed a willingness to consider date-based calls, but not in circumstances where the originating bank also seeks capital relief.
A number of banks' submissions to the Financial System Inquiry highlighted the concern that Australian securitised notes are not repo-eligible at the Federal Reserve, European Central Bank and Bank of England, despite the RBA accepting foreign securities as repo-eligible.
There is a strong sentiment among Australian banks that Australia should lobby for reciprocity to improve liquidity and international demand for Australian notes.
For some time, Australian banks have lobbied for the abolition of the '20 per cent rule', which prohibits an originating bank from holding more than 20 per cent of the notes in its securitisation deals.
In response to this, APRA has proposed a new rule requiring an originating bank to retain at least 20 per cent of the junior or subordinated notes in its securitisation deals. The rationale behind this is to ensure that banks have 'skin in the game' and are, therefore, less likely to originate dubious receivables and seek to transfer the risk of those receivables to a securitisation vehicle (which has traditionally been blamed as one of the causes of irresponsible lending practises). APRA has expressed the view that having originating banks hold at least 20 per cent of junior or subordinated notes should be sufficient to ensure that an originating bank's interests are appropriately aligned with investors interests.
However, APRA has suggested that it will impose restrictions on an originating bank from trading in its 'senior' notes if such trading is not in the ordinary course of business or otherwise provides implicit support to the securitisation.
APRA has invited written submissions to the proposals set out in its discussion paper. Based on the submissions made by the major banks to the Financial System Inquiry, many of APRA's proposals will be welcomed by the market. However, before implementation, there will undoubtedly be some tinkering with the terms, and some interesting discussion about any amendments to capital relief requirements.
The earliest the reforms are likely to be implemented is 2016. The market waits with great anticipation.