The local bible for debt capital market investors, Phil Bayley's The DCM Review, opines on the impact of CBA's landmark covered bond issue for the cost of all lower-rated securities, such as RMBS (implicitly), corporate bonds, and hybrids:
The normal relativity is that the covered bond credit spread will be at least one third lower than the spread on an otherwise equivalent unsecured bond. Clearly, secondary market pricing levels will go through a period of adjustment but which way they move remains to be seen.
The bad news coming out the CBA’s covered bond issue is that all other debt issues in the market will also be re-priced. If this has not already occurred, it will eventually.
Two asset classes will be hit hard by this, and one arguably more consequential than the other. The more consequential asset class is RMBS.
RMBS is a virtually identical product to covered bonds, also being secured by an underlying portfolio of mortgages. However, it is arguably a higher risk product given that there is no recourse to the originator of the mortgages, as there is with a covered bond.
Thus ‘AAA’ rated RMBS can be expected to attract a wider credit spread than a ‘AAA’ covered bond. There has been no movement in ‘AAA’ rated RMBS credit spreads in the secondary market since CBA’s covered bond issue.
There has also been no issuance of RMBS since the end of last year. Recent issues by Suncorp-Metway and ING, saw their senior tranches priced at 135bps over bank bills.
These levels are now unachievable and presumably, if we see any RMBS issuance in the short term, senior tranche pricing would have to exceed 175bps, by some margin (pardon the pun). In the past, such pricing has been considered uneconomic, with 150bps considered to be the upper limit.
AOFM had to buy RMBS at margins less than 150bps and below market levels to restart the RMBS market coming out of the GFC part 1. It may now have to do so again.
Alternatively, the banks may actually come to the rescue of the RMBS market – no doubt unintentionally.
It is widely expected that the banks will not pass on future RBA rate cuts to mortgage borrowers, in full. To the extent that this occurs, margins on mortgage lending will widen and thus RMBS issuance at spreads of more than 150bps on senior tranches will become more economically tenable.
The other asset class that should undergo a significant re-pricing is retail bonds, particularly those issued by the banks and especially bank hybrids. This will be a set-back for the on-going development of this fledgling market, in which the banks have been the most prominent and prolific issuers.
That said, no repricing is evident yet.
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