I think 2006 has seen a greater diversity in issuance. While prime RMBS transactions still account for the overwhelming majority of activity, this has been a big year for newer asset classes such as non-conforming residential mortgages and auto loans, as well as for more esoteric asset classes. This has been a significant factor in driving the performance of the overall market.
For example, so far this year, Liberty has completed three separate transactions totaling A$3 billion which is by far our largest issuance year to date and almost double our previous levels.
This has been driven primarily by the strength of our underlying lending operations. In particular, we continue to see strong origination volumes from our core non-conforming loan business, as well as substantial growth in our auto finance business, hence our second securitisation of ABS backed by a mixed pool of prime and non-conforming auto receivables in just over 12 months.
Is Asia becoming an increasingly important investor base?
For Liberty, Asia has always been an important investor base. For example, we have always received substantial investor interest for our senior Euro and US dollar tranches from Asian investors, and increasingly we are seeing interest lower down the credit spectrum.
How has the compression of spreads affected issuer behaviour?
I think for regular issuers such as Liberty, margin compression is not going to significantly affect our issuance behavior. For us, securitisation is a fundamental part of our funding programme and as a result, our activities are more focused on building a robust and deep funding programme with a long term perspective and outlook.
Is the market seeing the emergence of new asset classes to attract investors in a low yield market?
While there is undoubtedly more interest in new asset classes, I think this is driven by a range of factors. For example, investor feedback from our recent auto transactions has indicated significant demand for a diversity of investment classes. Similarly, LibertyÆs non-conforming mortgage business also provides investors with diversification for investors concerned over concentrated exposures to mortgage insurers. I also think that another factor is the increased comfort of investors with new asset classes stemming from more transparent transaction structures.
Liberty has to some degree, been at the forefront of developing new asset classes both in Australia and New Zealand, our latest innovation being the securitisation of prime and non-conforming auto receivables. We have also launched a non-conforming commercial mortgage business about a year ago and I would expect to see this flow through to the capital markets in the next 12 months. As we develop this new asset class our focus will again, be on building a solid funding programme that aligns the longer-term interests of both investors and Liberty.
What is the outlook for the growth of low-doc asset classes?
The pursuit of greater market share has led to some aggressive soliciting of low-doc loans which will see the continued growth of this segment. This growth has, however, produced both positive and negative outcomes.
LibertyÆs approach to this segment has been to focus on alternatively verifying an obligorÆs serviceability by triangulating their income from a variety of sources. This is always supported by a full valuation of the security including a detailed site visit, the assessment of comparable sales and consideration of the valuation under stressed conditions.
By contrast, we are aware of growing anecdotal evidence of valuers being pressured, as well as the increased use of desktop valuations which help applications qualify for ôlow docö treatment. Such ôlow docö customers would be particularly vulnerable in a downturn scenario - a situation that would be exacerbated if the underlying property valuations are not robust or realistic. So, we would expect spreads on such low-doc assets to adjust more rapidly in the event of economic difficulties.
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