Unisuper pumps stunning $1.3bn into major bank hybrids + banks cutting for RBA

Christopher Joye

Coolabah Capital

Today I argue that the smartest thing RBA governor Phil Lowe could do is get the banks to cut rates for him---preserving his monetary policy ammunition for a real crisis---and show that substantial reductions in bank funding costs might enable our largest lenders to do precisely that. I also reveal for the first time that Unisuper's John Pearce has pumped an incredible $1.3 billion into major bank hybrids, including a previously undisclosed $300m into NAB's latest deal (NABPF), which has soared since its ASX listing on Thursday to $100.80. I go on to explain how the RBA might help alleviate funding cost pressures by intervening in the "repo" market, and how APRA also has a role to play via its new TLAC policy. Finally, I contend that with national house prices plummeting, S&P may be compelled to look at downgrading recently issued RMBS deals in which LVRs and arrears rates are rising sharply while prepayment rates are dropping like a stone (click on that link or AFR subs can click here). Excerpt enclosed:

Home values across Australia’s five largest cities are about to pass through the 10 per cent peak-to-trough loss threshold, with the draw-down since their late 2017 apogee at 9.6 per cent.

That’s one line-in-the-sand where credit rating agencies have warned residential mortgage-backed securities (RMBS), which are suffering from a toxic combination of rapidly rising leverage, climbing arrears, surging supply (new issuance), and radically reduced prepayment rates, are at risk of being downgraded. (That also explains why while global credit spreads have been compressing sharply—contrary to most experts’ calls last year—RMBS spreads have not followed suit.)

Based on Core-Logic’s data, Melbourne and Sydney prices have fallen 10 per cent and 14 per cent, respectively, from their peaks, which coupled with the 5 city index results makes this the biggest correction in over 40 years.

Yet it's important to understand that this orderly unwinding of our largest financial stability risk is arguably the best thing that could happen to the Aussie economy at a time when commodity prices are elevated, exports are booming, growth is solid, the federal budget is coming into balance, and the jobless rate has contracted from 6.4 per cent to just 4.9 per cent. (In January 2018 we projected that the unemployment rate would fall from 5.5 per cent to below the RBA's “full-employment” threshold at 5.0 per cent, which it has now done.)

When the chief risk officer at a major bank tells you he would like prices to shrink another 10 per cent, you get a sense of just how valuable this mean-reversion is. To be sure, it is shocking news if you own subordinated, non-bank RMBS issued in 2017 or 2018 with low-to-no-seasoning (ie, full of recently originated mortgages) and lofty loan-to-property value ratios (LVRs), which derives its security from housing collateral that is declining every day. On the other hand, it is positive news for a systematically important bank with government-guaranteed deposits, access to the RBA’s emergency liquidity facilities, and a home loan book sourced over decades with low LVRs that is being constantly refinanced with new assets.

That is why Standard & Poor’s has warned about the risk of downgrading recently-issued, junior-ranking RMBS at the same time as they are signalling they may upgrade the major banks’ hybrids and subordinated bonds once Australia's economic imbalances normalise.

In one new RMBS deal launched this week, S&P cautioned that a 10 per cent drop in house prices could smash a AAA rated tranche down six notches to A- and reduce the AA rated tranche down to a junk BB+ rating even after accounting for lenders mortgage loss insurance (holding all other variables constant).

Read the full column here.

Oh and you can listen to our Complexity Premia podcast here or over at iTunes here.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Please sign in to comment on this wire.