Hunting value: The case for an international approach to ABS

International ABS offers better risk-adjusted opportunities than concentrating on a single domestic market, because regional differences allow investors to avoid poorly priced risks and select more attractive structures.

• A domestic approach limits issuers, collateral types and market structures while increasing exposure to one economic cycle, regulatory regime and source of demand.
• The authors favour opportunities outside the US because US ABS spreads have compressed, offer limited margin for error and may not fully compensate for credit and structural risks.
• UK and European ABS markets are preferred partly because regulatory risk-retention rules require issuers to retain an economic interest, while European markets generally offer conservative underwriting, strong protections and robust disclosure.
• Australia’s securitisation market has more than A$200 billion outstanding, with issuance above A$90 billion by late September; offshore investors represented more than half of demand in recent transactions.
• Australian RMBS, non-conforming RMBS and auto ABS arrears remain within recent ranges, although higher rates, tax changes, softer housing conditions and modest arrears increases at some issuers require monitoring.

Takeaway: Investors should use an international, selective approach to compare regions and individual transactions, with Australia offering relative-value potential, while recognising that ABS structural protections do not eliminate credit risk.