Robust Performance of Auto ABS in Australia’s Securitisation Market
With a record-breaking year for securitisation volumes in Australia, it’s the asset-backed securitisation (ABS) issuers who are leading the charge. Approximately A$18 billion has been issued to date this year, and a significant portion of that, around $14 billion, can be attributed to auto ABS, as reported by Vladimirs Zlotnikovs, an associate director of structured finance at Moody’s.
The thriving state of auto ABS issuance was a central theme at the Australian Securitisation Forum’s annual conference in Sydney. Matt Devine, the chief financial officer at Allied Credit, expressed that this year has been particularly strong for issuers, thanks to the sustained interest from Japanese and European investors and an impressive domestic performance.
Auto ABS: Lower Risk and High Attractiveness for Investors
Peeyush Pallav, the Asia Pacific head of real estate asset and structured finance for Mizuho Securities, emphasised that auto ABS presents a lower risk profile compared to other securitised assets, making it highly attractive for offshore investors. He noted that Japanese investors, in particular, are more inclined towards the Australian securitisation market when it comes to auto ABS.
This preference is partly due to the ease of understanding auto ABS compared to other areas like housing markets in different jurisdictions. However, Pallav warns that the auto ABS market is not without its challenges, especially as electric vehicles (EVs) begin to make up a larger share of collateral pools.
Risks and Opportunities in the Evolving Auto ABS Market
The emerging risks in the auto ABS market include changes in vehicle pricing by major manufacturers, the need for a better understanding of battery life for EVs as it influences the residual value, and the potential for investors to offload their auto ABS holdings in stress situations.
Devine adds that the auto ABS market has become dynamic, with three primary types of collateral pools each offering distinct outcomes for investors. These include novated leases, electric vehicles, and hybrids. With increasing questions around Tesla’s price changes, new Chinese manufacturers entering the Australian market, and a recent uptick in hybrid sales, the auto ABS landscape is witnessing significant shifts.
Government incentives have also been instrumental in boosting EV sales, potentially distorting the market. However, as Caroline Dunlop, head of funding at Avanti Finance, highlighted, these incentives are not always consistent, as seen with the sudden drop in EV sales in New Zealand after the government stopped offering incentives.
Addressing Fraud Concerns in the Auto ABS Market
Recent allegations of fraudulent accounting by US lender and used car retailer Tricolor Holdings, who have been accused of double pledging loans as collateral for multiple warehouses, were also addressed by the panel. The panellists were unanimous in their belief that this does not impact the appeal of the Australian ABS market.
Devine and Dunlop reassured that the regulatory environment in Australia and New Zealand is distinct from the US. They emphasised the importance of due diligence and affirmed their confidence in the ability of originators to identify and address potential fraud.
This comprehensive insight into the thriving auto ABS market, its potential risks, and the robust regulatory environment underscores the market’s appeal to investors. It serves as a testament to the industry’s resilience and the continuing opportunities it offers for investor value.
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