Rising investor demand for structured product away from plain vanilla RMBS has been supportive for those Australian bank issuers that have started to explore the potential of the collateralised loan obligation (CLO) market as a balance sheet management tool in advance of the introduction of the Basle II requirements in Australia at the start of January 2008.
The CLO market has, for example, already become an important part of National Australia Banks preparations for Basle II, which are already very well advanced, according to Martin Halloran, global head of capital markets structuring at nabCapital in Sydney. "Weve done two very large balance sheet CLOs in the last two years, for US$1.3bn and US$1.5bn, and we have also done a number of private placements, so in total we have now placed several billion dollars of issuance into the market off our balance sheet in the form of CLO product," he says.
"Weve done so using a synthetic platform as opposed to a true sale, and that programme has created a lot of interest in the market, with ANZ following our initial CLO with a deal of its own. So deals of that kind are starting to change the character of what used to be a fairly plain vanilla-style securitisation market."
That trend, says Halloran, has been made possible by the increased sophistication of the domestic investor base, which has been quick to embrace new products such as CLOs. "When we first went out to market the CLOs we werent sure that institutional investors in Australia were sufficiently familiar with that type of product and we were very pleasantly surprised at their response," he says. "They had seen a lot of CLO product from North America and other offshore banks, so they werent new to the structure."
That was just as well, because unusually both the NAB CLOs were fully funded structures with no super senior swap. "We chose the fully funded structure for two reasons," says Halloran. "First, to gain as much term structural funding as we could, and second to maximise the amount of regulatory capital relief we could generate. That obviously meant that we had a lot of bonds to sell, and we placed much of the senior tranche offshore as well as with domestic institutions," says Halloran. "But to our great surprise we were also able to sell a lot of the mezzanine portion domestically." NAB retained the equity tranche itself.
Generating international support for NABs most recent CLO in September 2006 was important, says Halloran, because ANZ was in the market at the time with a deal of a comparable size and structure, but denominated exclusively in Australian dollars and therefore sold more domestic investors.
"Although there is clearly strong demand for CLOs locally, we felt that the market may have struggled to digest two fully funded balance sheet CLOs in Australian dollars at the same time, equating to almost A$3bn of issuance," he says.
Halloran says that he has also been delighted by the performance of both NABs CLOs, which referenced predominantly investment grade loans originated by NAB, largely in Australia but also in Europe, North America and New Zealand.
That performance, he adds, has been especially heartening in light of the LBO boom in Australia that has brought with it a sharp increase in the vulnerability of companies to ratings downgrades.
NABs last CLO was in September 2006, and Halloran says that the bank will certainly be bringing more transactions in the future as part of its OWD (originate-warehouse-distribute) strategy. "We want to provide a full service to our customer base but we also want to be able to warehouse and distribute certain risks for capital velocity purposes," he explains. "CLOs are an efficient and accepted tool for doing so, and by allowing us to free up capital have made a very important contribution to lifting our return on equity."