Beginning with the traditional raw material of residential
mortgages, the Australian securitisation market has developed into
one of the most sophisticated in the world. Other asset classes are
now being added to the mix, although this move is not enough in
itself to reduce the preponderance of mortgage-backed securities in
domestic investors' portfolios.
Australian originators have begun to move offshore in an attempt to
tap into new sources of bond buyers. Nick Parsons reports.
Although modest in volume, Australia's securitisation market is
in many ways second only to the US in terms of maturity - in the
sense that it comprises regular repeat issuers and a streamlining
of product structures.
Moreover it is growing steadily: Standard & Poor's for example rated A$11.3bn worth of securitisation transactions in the first half of the year - compared to A$12.3bn for the whole of 1997.
As with the early days of its US counterpart, the Australian market has developed largely on the back of residential mortgage-backed deals. These were initially offered by the state-government sector, then the private non-bank mortgage institutions. More recently the banks themselves arrived to add credibility.
All the main lenders in the mortgage market use securitisation - a situation rare enough in Europe, let alone Asia. They benefit from using as a matter of course four highly rated insurance companies which specialise in guaranteeing mortgages, thus providing extra guarantees on top of already relatively sound collateral.
"The Aussie mortgage market is a great credit story," says one Sydney-based banker. "House prices are more stable than in Europe or the US and defaults are considerably lower, and yet there is still a lot of diversity."
More than 50% of the $38bn Australian securitisation market at June 30 was made up of mortgage-backed securitisations. But that figure is lower than in previous years.
"Securitisation will still be dominated by the mortgage market in the near and medium term future because that is where the assets are," says Ted Berbage, director of the structured finance group in Australia at S&P, "But we are seeing more retail auto loans, commercial hire purchase, and there is now a lot of talk about commercial real estate."
He continues: "The trend is towards diversification away from residential mortgages towards these other sectors, just as there is an increasing acceptance of securitisation as a viable funding source; now that issuers and investors are familiar with the technique, more and more companies are likely to use securitisation."
In the last two years the market has seen a growing volume of asset-backed commercial paper issued via a black box-type multi-asset repackaging vehicle, adds one structured finance banker. The number of Australian dollar asset-backed CP conduits has reached 29 - compared to just 12 two years ago. He adds that "some of these are now moving away from short term CP into longer term financing."
As well as other asset classes emerging in the Australian securitisation arena, even traditional mortgage-backed deals are getting larger, more ambitious and essentially global in their outlook. This last feature is by necessity.
"The residential mortgage backed market is reaching maturity," says Phil Richards, head of structured finance at Macquarie Securitisation Ltd, previously known as PUMA Management.
"One cannot issue A$1bn in the domestic market because it cannot support the level of volume consistently. So all the major securitisation issuers - Westpac, PUMA, St George Bank and RAMS - have gone offshore where they can find a much greater consistency of funding at much greater levels."
A RAMS deal last month, for example, even after being fully swapped (at a low point for the currency against the US dollar) still proved cheaper than any Australian dollar deal could have been.
A major breakthrough came in late May with Westpac Banking Corp's $1.4bn global deal, which established a new liquid benchmark for MBS deals in general.
Structured by JP Morgan and lead managed by JP Morgan, Morgan Stanley Dean Witter and Westpac, it was the first securitisation of non-US mortgages registered with the SEC as a global bond; indeed it was the first ever Australian global issue and also the country's largest private sector financing.
The $1.3727bn senior tranche of triple-A rated notes were priced at 14bp over three month Libor with a 3.3 year average life; while the junior tranche of $32.5m (rated AA-) has a 5.7 year average life and pays 26.6bp over Libor.
Less than a month later, Macquarie Securitisation, Australia's leading non-bank mortgage lender, took advantage of European demand by following up with a $450m MBS deal through JP Morgan and Deutsche Bank, achieving new benchmark pricing beyond the level established by the Westpac deal.
This transaction for PUMA Finance Ltd E-2 Series 2 A used a different structure. Instead of using SEC registration to attract US investors, Macquarie opted for the type of structural enhancements which Europeans favour, says Richards. The deal came with two such features: a substitution period and time-call option - both of which reduce pre-payment risk for investors.
The issue consisted of two tranches of triple-A rated notes - $120m of bonds with an average life of 2.1 years and coupon of 10bp over three month Libor; and $330m of 4.7 year average life paper paying a coupon of 14bp.
RAMS, the country's second largest non-bank mortgage lender, joined the global fray last month with a $400m mortgage-backed Eurobond via JP Morgan. By then, however, demand for Australian MBS - as with most other asset classes - had weakened after Russia's latest contribution to global economic uncertainty and a tumble in the Aussie dollar.
RAMS Mortgage Corporation Series 5E offered two senior triple-A rated tranches - including $100m of paper at 14bp over three month Libor and a 2.7 year average life and $284m of bonds paying an 18bp spread with a 5.3 year average life - and a third, $16m subordinated tranche rated AA- carrying a margin of 43bp.
The deal was reduced from $450m and spreads were back on their way up again. Still, bankers agree it was a respectable achievement in the circumstances: the senior tranches were only slightly up on previous deals although the 43bp coupon on the subordinated tranche was substantially higher than usual.
Macquarie Securitisation, formerly PUMA, and RAMS are two of the mainstays of the Australian market, since as the country's top two centralised lenders they use securitisation as their primary funding source. PUMA for instance issued A$5bn of securities to fund loans through mortgage originators between 1993-1997.
Indeed PUMA Management kick started the trend toward securitisation via global bonds in March 1997 with its heavily oversubscribed $700m debut in the Eurobond market - achieving pricing finer than many European mortgage-backed issues.
This was partly a reflection of Australia's lower default levels, as well as the backing of mortgage insurance companies, and partly due to the sector's attraction as a diversity play for investors.
Two triple-A rated senior tranches came at 8bp and 13bp over Libor with respective average lives of 2.05 years and 4.97 years. A subordinated tranche of $35m, rated AA-, offered a margin of 27bp on a six year average life.
PUMA returned in November 1997 with a $900m Eurobond priced just 6bp wide of its March deal on a weighted average basis, despite an up-to 10bp gapping out of the whole Eurobond curve since the Asian crash began two months previously.
The bulk of the issue comprised a $666m tranche carrying a coupon of 19bp over three month Libor with a 5.1 year average life and $180m of paper paying a 13bp margin with a 2.6 years average life.
In between these two JP Morgan-led deals, Westpac brought its first international securitisation to market in September. Four banks - JP Morgan, Morgan Stanley, SBC Warburg Dillon Read and Westpac - led the $517m MBS deal which was oversubscribed despite some criticism that it had been too tightly priced (the main tranche offered triple-A rated paper at 13bp over Libor on an average life of between 3.2 and 4.1 years.)
While a core group of originators are driving the market, new names are set to add variety. Suncorp-Metway, a Queensland-based financial group, has announced plans to put a MBS funding vehicle together by the end of the year with SBC Warburg Dillon Read advising. The potential issuer has home loans worth about $5.5bn.
In addition, Colonial State Bank has said it will securitise $493m of mortgages via Colonial Assets Securitisation Trust.
Until regulatory changes in mid-1997, there were considerable impediments against offshore issuance, most notably through restrictive withholding tax applications. Some obstacles remain but further legislative changes are expected to remove these.
Two more changes are being proposed: the first will allow a domestic issuer to issue simultaneously in Australia and offshore; the second will enable offshore investors to buy domestic bonds in Australia by lifting the withholding tax applicable on the international payments.
Despite this rise in international MBS issuance, there are signs that some investors are looking to diversify away from a residential mortgage sector toward which they have developed relatively high exposures.
Many have high hopes for a thriving auto-receivables market, after all one of the main asset categories in the US.
Australia is a long way behind that model, but the market has already opened.
The first move came from Sanwa Finance Australia in June with a $150m transaction led by Bankers Trust. Its Symphony Trust No 1 securitised a mixed pool of private sector equipment and commercial vehicle hire purchase contracts.
Ford Credit Australia has announced a second auto receivables deal - probably of around A$150m - to be led by CSFB; the transaction will kickstart Ford's programme of securitising its A$2bn-plus book of receivables.
Bankers say that while these deals are significant as a first step, their significance is mitigated by the fact that a relatively large first loss facility is retained by the seller and not sold into the capital markets. Says one: "It is relatively easy if you have a big balance sheet like Ford or Sanwa; you are really providing your own credit support to the transaction."
In Sanwa's Symphony offering the revenues being securitised will comprise repayments on loans made to finance the purchase of its cars by dealers and motorists.
Primarily made up of $144m of triple-A rated paper, the deal was structured with major credit enhancements, most notably a first loss facility that could absorb more than five times the company's historical losses.
Other asset sectors are also emerging, to offer investors the opportunity to reduce the dominance of residential mortgages in their portfolios.
In the last year alone Citibank has launched the first domestic collateralised loan obligation via its ICON trust; ABN Amro has securitised third party receivables with its Tasman vehicle; Macquarie Securitisation has established the POLAR programme to fund personal finance assets; and Ansett Australia's $75.2bn aircraft financing through SocGen Australia claims to be the first highly-rated securitisation for an unrated airline.
Adding to the rich mix that is becoming the Australian securitisation market, Japanese subsidiaries in Australia are beginning to covet its balance sheet advantages, as well as the benefits of getting away from parent funding. EW