ASJ Issue 2 (June 2012)

ASJ Australian Securitisation Journal

Incorporating Australian Securitisation & Covered Bonds >> Issue 02 • 2012

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ASJ Australian Securitisation Journal

Incorporating Australian Securitisation & Covered Bonds

>> Issue 02 • 2012

Asf Management Committee Chairman Tim Hughes Deputy Chairman Patrick Tuttle Treasurer Chris Green Chief Executive Officer Chris Dalton Chief Operating Officer Alex Sell asf@securitisation.com.au +61 2 8243 3900 www.securitisation.com.au Asj Published By

www.kanganews.com +61 2 8256 5555 Managing Director Samantha Swiss sswiss@kanganews.com Editor Laurence Davison ldavison@kanganews.com Staff Writer Chelsea Wallis cwallis@kanganews.com Contributing Editor Kimberley Gaskin kgaskin@kanganews.com Project Manager Brydie Wright bwright@kanganews.com Subscriptions Manager Jennie Wright jwright@kanganews.com Design Consultants Hobra Design www.hobradesign.com Depósito Legal: B-36961-2011 Printed in Spain by CEVAGRAF, SCCL ISSN 1839-9886

© Asf 2012 except issuer profiles section (© KANGANEWS). Reproduction

Of The Contents Of This Magazine In Any Form Is Prohibited Without The Prior Consent Of The Copyright holder.

contents

2 Foreword 4 Welcome 6 ASF INSIGHTS 10 Q&A 11 COVERED BONDS 16 HOUSING MARKET 18 ROUNDTABLE 28 LEGAL EYE 31 Q&A 32 Q&A 34 ROUNDTABLE 44 FEATURE 51 Issuer profiles

The Hon. Wayne Swan MP Deputy Prime Minister and Treasurer of Australia

Chris Dalton CEO, Australian Securitisation Forum The Australian Securitisation Forum outlines its efforts in an ever-changing structured product market environment.

Tim Hughes Chairman, Australian Securitisation Forum Standard & Poor’s explains its ratings rationale and where Australia fits into the global picture.

The Reserve Bank of Australia looks at the state of play in the Australian housing market, including lending standards.

US investors and Australian issuers talk international RMBS demand, facilitated by National Australia Bank.

Sidley Austin partners discuss the consequences of a landmark post-Lehman legal decision for the Australian market.

Greg Tanzer Commissioner, Australian Securities and Investments Commission

Guy Debelle Assistant Governor, financial markets, Reserve Bank of Australia RMBS in the Australian domestic market: a buy- and sell-side perspective hosted by Commonwealth Bank of Australia.

Taking the pulse of Australian structured finance following the arrival of covered bonds.

51 ANZ Banking Group 52 Commonwealth Bank of Australia

Key asset class data on Australia’s first clutch of covered bond issuers.

54 National Australia Bank 55 Westpac Banking Corporation

foreword

Canberra, april 27 2012

I

t’s really great to once again have the opportunity to introduce the semi-annual industry journal published by the Australian Securitisation Forum (ASF). The first edition was packed with informative articles and perspectives from across the industry – an interesting and enlightening read.

It has certainly been a turbulent ride for the industry since I wrote my foreword to the previous Australian Securitisation Journal in September 2011. The inaugural issuance of Australian covered bonds, the clarification of liquidity rules for banks and daily developments in precarious European financial markets have marked a very interesting period.

International financial markets are still behaving cautiously in many respects, but Australia has continued to fare reasonably well, in part due to the critical passage of our covered bonds legislation.

With the world reeling from credit rating downgrades, austerity packages and perilous financial markets, covered bonds have been vital in opening a new, more reliable window for Australian lenders to diversify their funding sources, at lower cost and for longer maturities.

Since the passage of legislation, over A$28 billion (equivalent) of covered bonds has been issued by Australian banks in six denominations. With the largest Australian banks paving the way, opening the market and establishing a template for future issuance, I am looking forward to some competitors to the major banks taking advantage of this new funding source.

As for our securitisation market, there was a flurry of activity in late 2011 during which pricing noticeably deteriorated as investors kept one eye firmly on international market developments.

Following the Christmas break, with covered bond issuance jumping to life, Australian securitisation markets remained subdued. It has been encouraging to see residential mortgage-backed securities (RMBS) issuance resume. In particular, it is great to see the industry using innovative structures to attract new investor demand offshore. Whether this development proves to be a more permanent feature of our market, only time will tell. But it does demonstrate the importance of innovation for the industry’s future.

I am proud of the government support for RMBS issuance, which preserved the market’s superstructure during the most profound dislocation in global markets in generations, and has continued to support new issuance so smaller lenders can keep competing.

I am also confident that the industry is well placed to face the future – we have sound public finances with very low debt, solid growth, low unemployment and, as I continue to enjoy telling my international counterparts, no Australian prime RMBS has ever defaulted.

Thanks again to Chris Dalton and his colleagues at the ASF, and I hope you enjoy this edition of the Australian Securitisation Journal.

«With the largest Australian banks paving the way, opening the covered bond market and establishing a template for future issuance, I am looking forward to some competitors to the major banks taking advantage of this new funding source.»

The Hon. Wayne Swan MP

Deputy Prime Minister and Treasurer of Australia 2 · Australian Securitisation Journal | Issue 02_2012

Pepper Residential Securities Trust No. 9 Non Conforming Residential Mortgage Backed Securities A$300 Million Joint Lead Manager May 2012

Super Members Home Loans Series Securitisation Fund 2012-1 Prime Residential Mortgage Backed Securities A$1,000 Million Joint Lead Manager April 2012

RedZed Trust Series 2011-1 Residential Mortgage Backed Secured Pass Through Floating Rate Notes A$80 Million Arranger and Lead Manager December 2011

IDOL Trust Series 2011-2 Prime Residential Mortgage Backed Securities A$750 Million Joint Lead Manager November 2011

Acquisition of GE Capital’s Residential Mortgage Portfolio in Australia and New Zealand A$5,000 Million Senior Financier August 2011

FLEXI ABS Trust 2011-1 Consumer Asset Backed Securities A$133 Million Arranger and Sole Lead Manager June 2011

We can tackle the big jobs.

Just look at our CV. As you can see, we’ve got an excellent track record when it comes to Securitisation.

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Call your Relationship Executive or visit commbank.com.au/institutional

Commonwealth Bank of Australia ABN 48 123 123 124, Australian Financial Services Licence 234945, (“Commonwealth Bank”) is incorporated in Australia with limited liability. CLA1549

ASF welcome

Welcome to the second edition of the ASJ

A

fter more than three years in the role of chairman of the Australian Securitisation Forum (ASF) we bid farewell to Stuart Fuller, who has stepped down from the ASF’s National Committee due to the demands of his new role as global managing partner of King & Wood Mallesons. The National Committee expressed its deep gratitude for Stuart’s contribution and leadership of the ASF since 2009. We wish him luck in his new and exciting Hong Kong-based role.

We are pleased to welcome Tim Hughes, treasurer of Suncorp Bank, as the new ASF chairman (see Q&A on p10). Tim joined the National Committee in 2010 and his treasury responsibilities at Australia’s largest regional bank, including experience in funding through securitisation and possibly in the future through covered bonds, makes him an ideal person to lead the ASF. Patrick Tuttle, chief executive officer of Pepper Australia, continues as a deputy chairman and a second deputy chairman will be appointed in mid-2012 by the National Committee.

The ASF also congratulates Greg Medcraft, ASIC chairman, on his appointment as chairman of the International Organization of Securities Commissions (IOSCO). The ASF considers Greg to be an ideal candidate for this role given his international experience and leading role in IOSCO’s Task Force on Unregulated Markets and Products. The ASF is committed to work with bodies such as IOSCO to rebuild securitisation markets by improving disclosure and other market practices.

In this edition of the ASJ we profile the activity in Australia’s emerging covered bond market, which opened in late 2011 following the passing of legislation to facilitate such issuance by Australian banks.

Despite volatile market conditions, numerous issues of covered bonds have been made by the four major Australian banks, denominated in a variety of currencies. One of the objectives of the ASF in 2012 will be to work with the industry to develop a reporting and disclosure standard for issuers of Australian covered bonds. This will build on the disclosure and reporting standards already established for Australian residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) collateral pools.

Australia’s securitisation market has had a slower-than-usual start in 2012, partly as a result of the focus of the four major banks on establishing their covered bond programmes. Nonetheless, a variety of mortgage- and asset-backed issues have been completed to date – including auto loans, prime residential and non-conforming mortgages. The latest RMBS by ME Bank included an innovative US dollar tranche, which is an encouraging sign that demand exists among US investors for high-quality Australian RMBS. A key body of work to be championed by the ASF in the second and third quarters of 2012 will be to garner industry input to contribute to the development of a new prudential standard (APS120) to be drafted by the Australian Prudential Regulation Authority (APRA) in 2012. The ASF commends APRA for undertaking a comprehensive reconsideration of the standard given the development of the market and the impact of the 2008 financial crisis. We are keen to contribute to assist the development of a clear principle-based standard which will apply to securitisation by Australian financial institutions.

The introduction of covered bonds and the continued diversity of ABS and RMBS are promising developments for Australia’s debt capital market and global investors looking for exposure to the Australian economy.

I hope you find this second edition informative and look forward to seeing you at the 2012 ASF annual conference at the Hilton Sydney on 22 and 23 October 2012.

Chris Dalton

CEO, Australian Securitisation Forum 4 · Australian Securitisation Journal | Issue 02_2012

AUSTRALIAN SECURITISATION FORUM’SANNUAL CONFERENCE 22&23 OCTOBER 2012, HILTON HOTEL, SYDNEY

For more information and registration details please go to www.securitisation.com.au/asf2012

Analysis

ASF NEWS AND INSIGHTS: Structured finance market dynamics

Keeping an eye on changing market conditions and the developing regulatory environment has kept the Australian Securitisation Forum (ASF) – the industry’s peak body – busy engaging with all market participants, from government though to issuers and investors.

S

ince the inaugural edition of the Australian Securitisation Journal (ASJ) in 2011, we have seen a flurry of covered bond issuance by the four largest Australian banks, into a number of currencies and sold to a range of investor types (see charts on this page and facing page). This issuance, something the ASF advocated for over almost a decade and by March 7 totalled A$28 billion (US$27.9 billion) equivalent, was great to witness.

We are also poised to see other Australian banks follow the majors down this path. The development of this market has been fantastic to see, particularly given the cost and access issues associated with senior unsecured and residential mortgage-backed securities (RMBS) markets in Europe.

But the introduction of covered bonds has changed RMBS demand characteristics. The spreads at which some of the covered bond deals priced pushed out RMBS curves to levels that made it uneconomic for many issuers that were otherwise ready to go to market, as shown in the chart on p7 by the hiatus in RMBS issuance between December 2011 and February 2012.

In April 2012 we witnessed A$1.75 billion in RMBS issuance by two large retail banks, ING Bank (Australia) and ME Bank.

This has resuscitated confidence among other RMBS issuers that deals can be done and that investor indigestion created by consecutive domestic jumbo covered bond deals has ended.

In discussions with Australian domestic fixed income investors, we are told that many bought the inaugural local covered bond deals because of the coupon generosity of the issuers. Before those inaugural deals came to market, however, many domestic investors said they would not buy because they could not see relative value to senior unsecured and RMBS. Indeed, many of those investors have sold down their holdings to lock in attractive annualised returns given the tightening in secondary market spreads.

To summarise, then, we hope that the volume and pricing effects of covered bond deals in the local market will find a natural level and permit the market for RMBS to return to the levels to which we became accustomed in 2011.

Australian covered bond issuers 7 volume (A$BN Equiv.)

6 5 4 3 2 1 0 Nov 11 ANZ

Dec 11 CBA

Jan 12

Feb 12

NAB

S o u r c e : M a c q u a r i e d e b t m a r k e ts a n a l ys is a p r i l 3 0 2 0 1 2

6 · Australian Securitisation Journal | Issue 02_2012

Mar 12

Westpac

Apr 12

May 12

Market standards & practices Co-chaired by Vernon Spencer and Robert Camilleri, this active sub-committee seeks to initiate and respond to matters that seek to enhance the operational effectiveness of our market, and its standing globally. This year, following developments in RMBS market standards and practices in 2011, the ASF has launched its ABS Disclosure & Reporting standards. Particular thanks on this project go to ANZ Banking Group’s Gary Sly and Resimac’s Belinda Smith. Next off the blocks is the ASF Covered Bond Disclosure & Reporting Standard, which will be led by National Australia Bank’s Eva Zileli.

We continue to have close dialogue with regulators in relation to these standards insofar as our progress on bedding down the standards in the local market is concerned, as they are seen as key to investor confidence and financial stability.

Other initiatives underway include: ◆ Bondholder communications – in order to facilitate reliable and predictable information flow between issuers, trustees and end investors and their custodians. The Australian Securities Exchange (ASX) and the ASF are in discussions on how this might be operationalised, and the costs involved. The motivation for this rests with difficulties experienced by issuers and trustees in identifying end investors whenever noteholder consents are required. Having an ASX ‘ticker’ for individual RMBS and ABS series may also permit other benefits such as a single reference point to access monthly reporting and perhaps in due course price quotations. ◆ Synthetic RMBS Reference Curve.

Led by Robert Camilleri, ASF board member and managing partner of Realm Investment House, this initiative seeks to alleviate two related Achilles heels in our RMBS product – price discovery and liquidity – such

that we cast an archetypical collateral pool backing an archetypical A1 AAA tranche of RMBS (for both bank and non-bank issues, respectively) in order to solicit bid/offer spreads from buy- and sell-side market participants on a quarterly basis. The process is likely to be akin to the non-synthetic methodology adopted by the Australian Financial Markets Association for its administration of the bank bill swap rate. ◆ For bank issuers of RMBS, considerable interest is being paid to the clean slate to which the Australian Prudential Regulation Authority (APRA) has committed in terms of its prudential approach to bank securitisation. The ASF has a cross-section of Australian issuers as well as legal and accounting experts to ensure that we can fully support APRA in its endeavours to deliver a prudential standard that better reflects the realities of today’s securitisation landscape.

(AOFM) – actually sold a small parcel of its RMBS holdings in March 2012 to support price discovery in the broader market.

We are, however, very alert to the risks posed by the political changes afoot in Europe, most recently in the form of French and Greek voters’ opposition to austerity measures agreed and the fiscal stability pact entered into by their past

covered bond currencies

recent securitised issuance

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0

volume (A$BN Equiv.)

volume (A$BN Equiv.)

What ongoing global volatility has also taught us is that the government’s programme of being a cornerstone investor in RMBS remains crucial – it gives certainty to issuers, confidence among private sector investors and liquidity to the market.

Indeed, the government’s agency charged with managing the programme – the Australian Office of Financial Management

Nov 11 aud

Dec 11 NOK

Jan 12

Feb 12

EUR

S o u r c e : M a c q u a r i e d e b t m a r k e ts analy s is april 30 2012

USD

Mar 12 CHF

Apr 12 GBP

May 12

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Dec 10 RMBS

Mar 11 ABS

Jun 12

Sep 11

CMBS

Dec 11

Mar 12

Small-ticket CMBS

S o u r c e : M a c q u a r i e d e b t m a r k e ts a n a l ys is a p r i l 3 0 2 0 1 2

7

Analysis

Ever since the brutal effects of the 2008 financial crisis, the ASF has recognised the importance of relationships with policymakers. This includes The Deputy Prime Minister

and Treasurer (whom we thank again for the government’s support of the industry and his opening remarks in this edition of ASJ), Assistant Treasurer, the Australian Treasury and AOFM in Canberra, the RBA, our market regulators – the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority – state revenue offices (particularly Queensland and South Australia), and others. At a parliamentary level too we have remained engaged, backgrounding the coalition Treasury team and key backbenchers on market and policy matters.

In 2012 we lodged submissions to the Securities Exchange Commission, the International Organization of Securities Commissions and others in a bid to both promote and protect our market, largely by making the case to revise or exempt Australia from unwanted and in some cases unintended negative consequences. We will be monitoring amendments to the rule-making arising from the Dodd-Frank Act and the Volcker Rule. In Europe, in due course, we would like to continue to advocate having Australian collateral accepted at the European Central Bank and Bank of England.

We will be maintaining the high level of our resource allocation to these initiatives in order to remain trusted, providing counsel that is genuinely useful to our stakeholders and our market.

Our new chairman, Tim Hughes, has touched on offshore investor opportunities in his Q&A published in this issue of ASJ (see p10). We solicit issuer and arranger member feedback on these costly initiatives. Given the importance of offshore investors, we will continue to promote Australian securitisation and covered bonds in new markets such as Japan and Taiwan, and maintain dialogue with longstanding but presently not especially deep markets for Australian RMBS and ABS, such as Europe and Asia. It is especially in that latter camp, south- and north-east Asia, where we see scope for AUD, USD and JPY accounts to find value for issuers and investors alike given the painfully high cross-currency basis swap costs between AUD/EUR and AUD/GBP.

rmbs outstanding by main issuance currencies

australian rmbs issuance by main issuance currency

Investor engagement At recent meetings in Melbourne and Sydney, the ASF’s Fixed Income Investor Forum sought feedback on a number of the initiatives in the areas under discussion at the ASF in terms of market standards and practices (see box on p7). We are delighted to have such a vibrant local investor market and very much welcome their contribution to ensure that the outcomes of our work reflect the realities of both the buy and sell sides of the structured credit market.

Offshore, we will be resuming our global investor outreach with various sessions in London, Tokyo and Singapore. Again, just as with Australian fixed income investors, we see it as key to understand these investors’ preferences and expectations so we can ensure a sustainable awareness and a reputation as a reliable partner that is visible and responsive. leaders. The UK has also reported another recession, which we hope will not be long-lived, but given deep unemployment and sluggish growth among its neighbours this is far from assured.

What this all means indirectly for Australian RMBS, assetbacked securities (ABS) and covered bond investor sentiment remains to be seen, but we predict it will cause ongoing nervousness. Thankfully, our economy remains robust albeit with slowing growth to levels more in keeping with the Reserve Bank of Australia (RBA)’s central inflation target. This should relax the strength of the Australian dollar albeit beside a trend of ongoing weakening of the euro.

70

200 175 150 125 100 75 50 25 0 Dec 95

60 volume (A$BN Equiv.)

volume (A$BN Equiv.)

Engagement with government

50 40 30 20 10 0

Dec 97 AUD

Dec 99 USD

Dec 01

Dec 03

EUR

S o u r c e : M a c q u a r i e d e b t m a rket s analy s is april 30 2012

8 · Australian Securitisation Journal | Issue 02_2012

Dec 05 GBP

Dec 07

Dec 09

Dec 11

4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 aud

USD

EUR

S o u r c e : M a c q u a r i e d e b t m a r k e ts a n a l ys is a p r i l 3 0 2 0 1 2

GBP

Education mission A less conspicuous but by no means junior mission for the ASF is its education and training offering.

Since November 2011 the ASF has delivered six covered bond courses in Sydney, Brisbane and Canberra, equating to approximately 100 market professionals receiving contemporary content and teaching. Leading practitioners from their respective fields have devoted huge amounts of their firms’ time to producing the content for not just covered bonds but also for our new advanced-level course, Applied Securitisation. The new course is now available online for participants to book.

While there is an Applied Programme that permits industry practitioners to follow a pathway that mandates our core module (comprising Securitisation, Cash Flow and Waterfall Modelling) plus two electives, we also recognise that some will just want to take up a module applicable to their day-today role supporting securitisation products within their business. To help facilitate this, we have taken the decision to make the Contemporary Legal & Regulatory Developments, Advanced Accounting & Tax Issues, Principles of Credit Analysis and Transaction Governance modules available on an á la carte basis.

We would like to acknowledge the contribution of numerous ASF members and firms in this enterprise, which we know is a great benefit to the whole industry benefits and is doubtless one of the reasons we are one of the few countries to still have an enduring product.

Notwithstanding the Australian market’s desire to see much greater offshore participation, we now see from outstandings that in that paradigm to date the market has found a natural depth of around A$75 billion. The recent US$300 million A1 bullet 2a-7 money market tranche from ME Bank’s SMHL 2012-1 proved very successful for both the buyand sell-side and, accordingly, arrangers are looking closely at harvesting further opportunities in the US. We would also like to take this opportunity to thank our education partner, the Australian Financial Markets Association, which provides ASF with the necessary marketing, editorial and administrative scale to support our courses.

Finally, in terms of new horizons, the chairman has touched on the online module initiative that will enable us to deploy our Securitisation Fundamentals course in markets that previously – either for reasons of cost or distance – have

Contributors include: Core Module – Structuring, Cash Flow and Waterfall Modelling ◆ Robert Camilleri, Realm Investment House ◆ David Chisholm, Mòrgij Holdings ◆ Steve Magan, J.P.Morgan Advanced Accounting & Tax Issues ◆ Heather Baister, Deloitte ◆ Richard Balfour, Ernst & Young ◆ Phil Lee, Deloitte ◆ Graham Mott, Deloitte ◆ Debbie Hankey, Deloitte ◆ Tung Dao, Ernst & Young Contemporary Legal & Regulatory Developments ◆ Sonia Goumenis, Allen & Overy ◆ Karolina Popic, Allen & Overy Trustee Role, Responsibilities & Relationships ◆ Glenn White, Australian Executor Trustees ◆ Angelo Kalafatas, Perpetual ◆ Mark Dickenson, Perpetual ◆ Magnus Wilson-Webb, BNY Mellon Australia ◆ Jim Brooks, BNY Mellon Australia ◆ Tessa Hoser, Norton Rose Australia Principles of Credit Analysis ◆ Robert Camilleri, Realm Investment House ◆ David Chisholm, Mòrgij Holdings ◆ Steve Magan, J.P.Morgan ◆ Hayden Went, Commonwealth Bank of Australia ◆ Justin Mineeff, Commonwealth Bank of Australia

been unable to get access to our entry-level course. We are also delighted to be taking our education syllabus across the Tasman to our colleagues in New Zealand. This includes ASF Securitisation Fundamentals, ASF Covered Bonds Workshop and, we predict, our Diploma in Securitisation.

Forthcoming course dates can be found on the inside back cover of this magazine. ■ ◆ for further information please contact:

Alex Sell Chief Operating Officer + 61 2 8243 3900 asell@securitisation.com.au

9

q+a

Tim Hughes Chairman, Australian Securitisation Forum

As the Australian structured finance market continues to change in response to new opportunities and old challenges, the objectives of the Australian Securitisation Forum (ASF) are developing and expanding. The ASF’s incoming chairman, Tim Hughes, discusses how the ASF is responding to developing environment.

W

hat key dynamics are affecting the Australian securitisation market?

The year has started slowly in terms of primary issuance. A key contributor to that continues to be the difficulty in offshore markets. The large investor base that existed prior to the financial crisis is no longer there.

The domestic securitisation market has proven to be resilient and robust.

But our key challenges are how we can attract offshore investment back into our market and how we grow domestic investor involvement. We have a certain degree of reliance on offshore markets, so we are working hard to uncover new opportunities that work for both issuers and investors.

Another key issue is how the Australian market develops an exit strategy from its reliance on the Australian Office of Financial Management (AOFM) buying programme. The programme is reducing in terms of how much the AOFM has to invest and we are equally keen to see the market stand on its own two feet. But the industry will need to come together to facilitate a transition.

◆ How can Australian issuers engage

more with offshore investors?

We expect to see more engagement going forward as issuers tailor tranches attractive to both domestic and offshore investors, such as we saw with the recent ME Bank transaction. This deal included a one-year bullet maturity supported by a redemption facility provided by National Australia Bank (NAB), under which NAB 10 · Australian Securitisation Journal | Issue 02_2012

guaranteed to underwrite any potential shortfall in the tranche’s redemption fund at maturity date.

We see potential for more investor demand out of the US in particular, and the ASF is doing some work alongside issuers to cultivate this buying base.

Although smaller issuers and domestic issuers still have the problem of the basis swap to contend with, we anticipate more activity with US investors going forward.

There is also some real momentum in parts of Asia, particularly Japan and Taiwan, where investors are looking for yield and longer-dated secured investments. These investors are comfortable with Australian risk and are gaining more understanding of residential mortgage-backed securities (RMBS) product and structures. ◆ Real-money investors are less

prominent in the RMBS market right now. What will reignite their appetite?

There is still a core investor base that is comfortable with RMBS, but there may be some benefit in introducing a master trust structure to take out the prepayment risk and offer a bullet structure to fixed income investors.

We are currently working on recommendations around redrafting local regulation which will look to establish and include master trusts. This will be important for both domestic and offshore investors. ◆ What are the ASF’s key priorities

for 2012?

We are looking to build on successes in the disclosure and reporting space,

focus on prudential regulation reform, promote and build our industry reputation in domestic and overseas markets, and ensure that the industry can become self-sustainable in the medium to long term. We will also continue to focus on our successful education programmes, which have been instrumental in expanding the knowledge and expertise in our industry. ◆ How is the ASF engaging with

government and regulators?

Liaison with government and regulators is extremely important to the ASF. We have most recently been heavily involved in dialogue with the Australian Prudential Regulation Authority (APRA) about APS120. We have been able to discuss the issues for borrowers that are seeking clarity around whether they should execute funding transactions or full capital relief transactions and resolving the uncertainty around the sell-down of subordinated tranches. The regulator has welcomed our feedback and will be considering our recommendations as it comes to redraft APS120.

We are maintaining strong relationships and open dialogue with the federal government, engaging with both sides of the political spectrum, the department of Treasury, and the AOFM around developments in our industry. ◆ The ASF’s education mission is

critical to the development of the Australian market. How is the programme progressing?

We have developed a fantastic programme that is very well supported by all sides of industry. Our focus is to make sure the programme is current and relevant. We have already introduced a covered bond programme, for example, and we will continue to offer education resources that illuminate the secured market. We are also focused on the delivery of our resources and we are looking into online applications for our courses. ■

co-published feature

Why Standard & Poor’s Classifies Australian Covered Bond Programmes Alongside Canada And Much Of Europe

S

tandard & Poor’s Ratings Services (S&P) recently published its approach to rating covered bonds in Australia, where a combination of market conditions and new laws has encouraged major banks to quickly adopt this alternative funding tool over the past six months.

Vera Chaplin, structured finance regional practice leader for Asia Pacific, answers some key questions on the rating agency’s assumptions for classifying covered bond programmes in Australia, including why the country is ranked alongside Canada and much of Europe. She also explains why uptake of the new asset class has been strong in Australia and why she expects interest in covered bonds to stretch into new territories across the Asia Pacific region. ◆ In April 2012, S&P detailed its ratings

assumptions for Australian covered bonds for the first time, placing the country in the ‘Category 2’ group. what does this mean?

Under the S&P global criteria for assessing asset-liability risk in covered bond programmes, we segment these programmes

into three distinct categories that consider primarily the jurisdiction of a programme and its ability to access external financing or monetise the cover pool. These categories, along with the asset-liability mismatches (ALMM) percentage, determine a programme’s maximum potential rating uplift over the rating on the issuer.

The potential ratings uplift ranges for Category 1, 2, and 3 programmes is five to seven, four to six, and three to five notches, respectively. For each category, maximum ratings may be achieved within the range, dependent on the extent of the ALMM exposure. In short, the lower the ALMM exposure, the higher the rating uplift that may be achieved within the range in each of the three categories.

S&P has placed Australia in Category 2. This means Australian covered bond programmes are assessed at the same level as Canada and most European countries, including covered bonds issued by Finland, France (structured covered bonds), Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, and the UK (see table on p13).

Under Category 2, the maximum potential rating that can be achieved by an issuer is between four and six notches above the rating on the issuer. For example, an issuer rated A can issue a AAA-rated covered bond if all other risks are addressed.

Given that the maximum achievable rating is capped at AAA, it is possible that highly-rated issues may retain some ‘unused uplift’, which may create a certain amount of rating stability if the rating on the issuer were lowered. ◆ Why are Australian covered bond programmes not placed in ‘Category 1’?

The Australian covered bond market has a limited history compared with many well-established markets in Europe, which also benefit from more diverse funding options. As a result, countries such as Denmark, France (obligations foncières), Spain and Germany sit in Category 1. ◆ S&P has also clarified the target asset

spreads for Australian prime residential mortgage loans, placing these loans in ‘Bucket 1’. Can you provide details on this classification?

Under our global criteria, we group the cover pool assets in jurisdictions into one of three buckets and assign a target asset spread for each bucket for the purpose of market-value assessment in the event the underlying cover pool needs to be monetised.

The Bucket 1 classification means that if the Australian residential-loan cover pool at exposure (as estimated under our ALMM assessment) needs to be liquidated to repay covered bonds outstanding, we would apply a discount rate of a target spread of 425 basis points over the benchmark rate to calculate the present value of the projected cash flow from the collateral pool.

11

co-published feature

Summary of standard & poor’s revised criteria for assessing asset-liability mismatch risk in covered bonds Five key areas of Standard & Poor’s covered bond ratings analysis Asset risk

Cash flow risk

Operational and administrative risk

Legal risk

Counterparty risk

See relevant criteria

STEP 2: Programme categorisation

= =

STEP 3: The maximum potential covered bond rating

=

STEP 4: Cash flow and market value analysis

=

STEP 5: The covered bond rating

=

STEP 1: ALMM classification

Zero Low

Moderate High

Category 1 Category 2 Category 3

ALMM risk Zero Low Moderate High

Category 1 2 3 Unrestricted 7 6 5 6 5 4 5 4 3

Max potential rating uplift (notches)

Determine target credit enhancement to achieve maximum potential ratings uplift Compare target credit enhancement with available credit enhancement

© Standard & Poor’s 2009

This target asset spread reflects a ‘shock spread’, which is derived from analysis of a number of external sources combined with S&P’s own analytical opinion on the suitability and relevance of this data. Also, comparisons are made to similar products in other markets.

We analysed the secondary market trading margins of Australian AAA-rated prime residential mortgage-backed securities (RMBS) as a proxy for residential mortgage loan sales in Australia. We have included only prime RMBS in our analysis, as this is in line with the eligibility requirement to be included as cover pool assets. We also considered the extent offshore markets affect Australia, given it has a level of reliance on offshore funding. While Australian RMBS have performed well to date from a credit perspective, the Australian funding market tends to be influenced by key global capital markets.

As such, and in line with the key global markets, we assigned Australian prime residential mortgage loans to Bucket 1 with respect to target asset spread. ◆ S&P’s ratings methodology for covered bonds

looks specifically at five key areas, but there 12 · Australian Securitisation Journal | Issue 02_2012

seems to be a strong focus on ALMM risk. Why is this so?

First, it is important to stress that all five key areas of S&P’s ratings analysis for covered bonds are important. These include legal risk, operational and administrative risk, counterparty risk, asset risk, and cash flow risk, which includes ALMM risk assessment.

The reason the ALMM risk is important is that covered bonds tend to have bullet maturities that may create assetliability mismatch risk, and there are diverse opinions on the importance of this risk. From our perspective, where there is an ALMM risk exposure, the covered bond ratings will be weak-linked to the ratings of the financial institutions that issue them. We start with the scenario of insolvency of the covered bond issuer, because the covered bond ratings are typically elevated above the issuer rating and we need to look to the cover pool cash flows for rating elevation above the issuer rating. We then assess whether there may be substantial recovery from the cover pool to meet the outstanding covered bonds in conjunction with available mitigating factors for the ALMM risk.

standard & poor’s covered bond Programme Categorisation Category 1

Category 2

Category 3

Range of funding options

A programme has the flexibility to raise funds through BOTH asset sales AND borrowing from either banks or the central bank. There are no restrictions on when or how funds can be raised.

A programme is able to raise funds EITHER through asset sales OR borrowing from either banks or the central bank. There are no restrictions on when or how funds can be raised.

A programme’s access to funding is RESTRICTED so the sale of assets is forced.

Strength of funding sources

The covered bond market has, in our opinion, a long and WELL-ESTABLISHED history. In our view, systemic importance of the product is HIGH. We consider if there is a broad range of banks that are able to lend. We evaluate if there would be adequate demand among a broad range of investors for the assets backing the programme.

The covered bond market has, in our opinion, a LIMITED history. In our view, systemic importance is not as strong as Category 1. We consider if there is a broad range of banks that are able to lend.

We evaluate if there would be adequate demand among a broad range of investors for the assets backing the programme.

The covered bond product is NEWLY ESTABLISHED in that jurisdiction. In our view, systemic importance is LOW. We consider if banks are unable to lend to programmes. We evaluate if there is uncertain demand among a broad range of investors for the assets backing the programme.

Jurisdictions

Denmark, France (obligations foncières), Germany, Spain, Sweden

Australia, Canada, Finland, France (structured covered bonds), Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, UK

Greece, US

Maximum potential number of notches uplift from the ICR

5-7

4-6

3-5

SOURCE: STANDARD & POOR’S

The overcollateralisation sizing is less sensitive to the rating on the issuer or the rating migration because of the assumption of issuer insolvency at the outset. Our recent study Most Covered Bond Ratings Hold Steady As Issuer Ratings Fall found that over the six months to April 2012, almost 40 per cent of our ratings on institutions that issued covered bonds were lowered. However, only 16 per cent of covered bond ratings were lowered over the same period and 91 per cent of covered bond ratings remain in the AAA/AA rating categories. ◆ in s&P’s view, why have Australia’s big

four major banks been quick to take up the opportunity to issue covered bonds, both in Australia and offshore?

Although covered bonds have a very long history in some European jurisdictions, Australian banks were prohibited from issuing them until the Australian legislative framework for covered bonds came into effect in October 2011.

In a short space of time, however, covered bonds have emerged as an additional part of the funding mix for the major banks, with issuer and investor sentiment toward this funding tool now very favourable. Each of Australia’s four major banks – which remain materially dependent on wholesale funding – have established covered bond programmes and by April 18 together they had issued more than A$22 billion (US$21.9 billion).

Apart from the legislative changes, the flurry of covered bond issuance in Australia has coincided with the adverse market conditions in funding markets worldwide, especially

in Europe, as well as banks’ growing preference for secured funding. Financial market dislocation and continued instability have heightened the importance of diversification of the investor base of Australia’s major banks, and it is clear that Australian banks believe covered bonds play a part in serving this purpose. ◆ Is investor demand for covered bonds likely to spread across the rest of the Asia Pacific region?

Anecdotal evidence suggests that issuer and investor interest in covered bonds is growing strongly across the Asia Pacific region, although so far actual covered bond transactions have been largely from banks based in Australia, New Zealand and Korea.

However, we note that some policymakers in the region are preparing to introduce new legislative- or rules-based frameworks for covered bonds. For example, the Reserve Bank of New Zealand and the Monetary Authority of Singapore have released consultation documents on the subject.

Although Asia Pacific jurisdictions have taken a ‘legislative light’ approach to covered bond regimes, we believe legislation creates confidence for investors and issuers on how stakeholders, such as regulators, will treat covered bonds. In some Asia Pacific jurisdictions, another key challenge relates to the assessment of ALMM risks, particularly in countries where there is limited secondary market information available. In S&P’s analysis, we look to assess other mitigating factors for ALMM risk. ■

13

co-published feature

Prudent mortgage lending standards help financial stability: lessons from the US Luci Ellis, head of the financial stability department at the Reserve Bank of Australia (RBA) in Sydney, investigates the US housing meltdown, highlighting the unique set of circumstances that led to a crisis. In doing so, she points out why mortgage distress would be unlikely to precipitate a crisis in countries like Australia, which do not have the same lax lending practices that existed in the US.

M

any observers look at the US housing meltdown and wonder whether it could happen in other countries. For a number of reasons, that would be unlikely. The US has some unique characteristics that enabled the meltdown.

In most countries, increased mortgage distress occurs with economic downturns. That has been the experience of Ireland and Spain, for example. Mortgage distress does not normally precipitate a crisis, so why was the US experience so different?

The reasons are complex, but they can be boiled down to lax lending practices. Lending standards eased in the US far beyond what was seen in other countries. And they eased in a way that exacerbated the tendency of mortgage borrowers to default in a bust. The system of financial regulation did not stop this easing: there were gaps in both prudential and

16 · Australian Securitisation Journal | Issue 02_2012

consumer protection regulation. Even where regulation applied, it did not prevent lending practices not seen elsewhere, especially around income documentation and amortisation – and not just in sub-prime.

Dangerous assumptions Sub-prime lending has long been a niche in US mortgage finance. The established lenders understood that it was a risky customer base: people with a history of missing payments on other debt. Yet brokers and lenders did not verify incomes or other financial obligations of sub-prime and other non-prime borrowers. Instead, they focused more on collateral value. If housing prices kept rising, lenders assumed, the borrower could either refinance or sell, and everything would be fine.

Alongside lending standards at the point that the loan is made, what happens during the life of the loan also matters a great deal. Some recent research by economists at the Federal Reserve suggests that it was not high proportions of subprime loans that predicted which districts would have worse outcomes for prices and loan defaults (Barlevy and Fisher 2010). Rather, it was the proportion of new lending that was interest-only loans. These loans were not being paid down. In some cases, the loan balance was increasing through cash-out refinancing or explicit negative amortisation. Paying your mortgage down before the bust is the most effective way of avoiding getting into negative equity once housing prices start to fall, so it is no wonder US households were more likely to get into trouble.

Lax tax, re-draws and elastic supply It turns out that a range of tax and legal differences in the US, as well as industry convention, created a system that discouraged amortisation. For example, US owner-occupiers’ mortgage interest is tax-deductible, which is not a feature of the Australian or Canadian tax systems (Ellis 2010). In addition, most US mortgages are fixed rate, and the variable-rate mortgages that were on offer did not allow the borrower to make pre-payments that can be redrawn later if needed. Such ‘redraw’ loans are common in Australia and have proven a highly effective vehicle for precautionary savings.

This meant that in the US, loan-to-valuation ratios (LVRs) that were high at origination stayed high well into the life of the loan. American households are less likely to pay their mortgages down ahead of schedule than Australians. And trade-up buyers seem to have high LVRs in the US, which doesn’t appear to be the case in Australia. As a result, US housing stock is far more leveraged than that in Australia.

Another unusual feature of the US system is that housing supply is quite elastic, at least in enough parts of the country to matter. The housing boom was a construction boom as well as a price boom. As a result, by 2006 there was already a substantial overhang of excess supply. The inherent stock-flow interaction in the housing market means that construction

booms sow the seeds of their own destruction. Prices can undershoot formerly sustainable levels.

The US mortgage market is also unusual in its reliance on capital markets for funding. During the boom, on-balance sheet mortgage lending was not seen as being a profitable or attractive business for US banking institutions – a stark contrast to Australia and many other countries.

Maintaining standards As the RBA has made clear many times before, one important reason Australia did not go down the same road as the US is that lending standards did not ease as much here. Even at its peak, sub-prime lending was only ever a tiny fraction of the total. Low-doc loans were also a small niche.

And we never saw in Australia the explosion of zero-deposit loans – or worse, the 125 per cent loans that were available in the UK. In Australia in recent years, around two-thirds of new mortgage borrowers from banks had an initial LVR below 80 per cent. If we look at the whole mortgage book, that fraction is even higher.

faster than the contract requires. This is a welcome feature of the Australian market that is rarely seen overseas. The faster they pay mortgages down, the less likely they are to end up in negative equity; they have a head start if prices should fall.

The international regulatory community is highly aware of the role of lax lending practices in the US meltdown. In response, the Financial Stability Board (FSB) has released some global principles for sound mortgage lending practices, which all countries should follow. The FSB principles recognise that lending standards are multidimensional.

The focus should not be on maximum LVRs at origination, ignoring all other aspects of lending standards; capacity to service the loan is far more important.

If lenders were to ease lending standards beyond the point of prudence they would not be doing anyone any favours.

Their customers, the borrowers, would be overburdened by their debts. The firms themselves would face difficulties if loan defaults were to rise. And financial stability would be much harder to maintain. I am pleased to say that I do not currently see signs of widespread lax lending practices here in Australia.

“American households are less likely to pay their mortgages down ahead of schedule than Australians. And trade-up buyers seem to have high LVRs in the US; that doesn’t appear to be true in Australia. As a result, the US housing stock is far more leveraged than that in Australia.”

A large part of the reason why lending standards did not ease as much here is that prudential supervision is stricter.

Unlike in the US, in Australia most mortgage lending is done by firms that are prudentially regulated. Also unlike the US, there is only one prudential supervisor, the Australian Prudential Regulation Authority (APRA). Australian lenders cannot arbitrage differences in prudential treatment across different regulators.

Some Australian mortgage lenders are not prudentially supervised, though, so consumer protection standards around credit are a vital part of the authorities’ defence against a US-style outcome. These standards have been broadened in Australia in recent years, and shifted to a national framework administered by the Australian Securities and Investments Commission. But the earlier state-based system still had the three features most needed to avoid US-style problems: it was nationally consistent, it covered all consumer borrowers, and it covered all lenders consistently, regardless of whether or not they were prudentially supervised.

Another important mainstay against a US-style outcome is that many Australian households actually pay their mortgages down, often quite quickly. Estimates vary, but it seems as many as half of owner-occupiers with mortgages pay down

Indeed, APRA has been consulting with the boards of the larger banking institutions about their housing lending standards.

But there will be times – good times, when everything seems rosy – when lenders will find it hard to maintain the necessary prudence. While the regulators can take actions and central bankers like me can warn of the risks, in the end we all have a stake in maintaining financial stability. ■

◆ Barlevy G and JDM Fisher (2010) Mortgage Choices and

Housing Speculation Federal Reserve Bank of Chicago Working Paper WP-2010-12. ◆ Ellis L (2010) The Housing Meltdown: Why did it Happen in the

United States? International Real Estate Review, 13(3), pp 351–394. ◆This article comprises edited extracts of two of Dr Ellis’ recent

speeches: Prudent Mortgage Lending Standards Help Ensure Financial Stability (address to the Australian Mortgage Conference 2012, Sydney, 23 February 2012, http://www.rba.gov. au/speeches/2012/sp-so-230212.html) and Moderator’s Opening Remarks for Panel Discussion on Mortgage Finance (Federal Reserve Bank of Atlanta 2012 Financial Markets Conference, 11 April 2012, http://www.rba.gov.au/speeches/2012/sp-so-110412.html).

17

roundtable

Buy-side diversity search spurs US investor engagement Australian securitisation market participants say the domestic investor base, even if efforts to widen participation succeed, needs to be supplemented by a consistent offshore buyer base. Long-term work with international investors has started to produce dividends in the form of US dollar issuance, but understanding the specifics of US demand will be key to the further development of this vital distribution channel. National Australia Bank (NAB) invited two US-based investors to discuss these issues, along with Australian issuers, at a roundtable discussion hosted in Melbourne at the beginning of May.

PARTICIPANTS ◆ John Barry Head of Securitisation NATIONAL AUSTRALIA BANK ◆ Paul Garvey General Manager, Funding and Financial Markets ME BANK ◆ Arkady Lippa Director, Securitisation NATIONAL AUSTRALIA BANK ◆ Pia McCusker Managing Director and Head of Structured Credit Research STATE STREET GLOBAL ADVISORS ◆ Francisco Paez Director METLIFE ◆ Andrew Twyford General Manager, Group Treasury NATIONAL AUSTRALIA BANK MODERATOR ◆ Laurence Davison Editor KangaNews

18 · Australian Securitisation Journal | Issue 02_2012

US-based Demand Davison In general terms how important is it for

the Australian securitisation industry to develop offshore demand for its product – especially from the US?

◆ Barry I’m sure issuers will agree that the Australian market is not delivering everything they need. We have a concentration of domestic investors in the banking sector without a lot of real-money participation, so the need to expand the non-core currency base has never been greater.

Clearly it is not the right time to tap Europe given the euro crisis and regulatory disincentives. We can see what UK prime issuers have achieved in the US and it makes absolute sense for Australian securitisers to concentrate on the US. The challenges the market faces will not be solved by a single initiative. It will be a combination of factors: trying to get greater domestic asset allocation in securitised product, levelling the structural playing field, and accessing the offshore investor base.

Davison What are US investors looking for in

residential mortgage-backed securities (RMBS), and how do those preferences apply to Australian product?

◆ McCusker Within the global cash portfolio at State Street Global Advisors, for which I head the ABS credit research team, we are predominantly looking for short-tenor, high-quality assets. That means tenor inside two years and, generally, triple-A paper. This is a change from where we were in the pre-crisis years, where tenor could be as long as three to five years. The change has come in because of the extension risk experienced in the market and tighter 2a-7 rules.

Our fixed income group may have an interest in longerdated paper from offshore but predominantly we look at the short end. We have participated in some Australian deals that have come to the US market in recent times. ◆ Paez The nature of our business gives us a different perspective on tenor. We want to source assets that fund liabilities from our insurance business, which results in greater interest in the mid-to-long part of the curve. Also, the void of issuance in the US domestic market from some of the traditional securitised sectors is biggest in the three- to 10-year part of the curve.

Regardless of tenor, we look at Australian RMBS as an alternative to other structured assets globally. From that perspective the key priorities for us are sound underwriting, strong disclosure and transparency, a good track record and attractive relative value. For the most part Australian RMBS meets those criteria.

Davison Francisco Paez mentions the dearth of

supply in the US securitisation market. Is that

the main driver of demand for offshore product? ◆ McCusker

A lot of our demand comes from flight to quality, and I think many investors are moving away from unsecured exposures to financial institutions and, especially, from the European banking sector.

Our clients want to add exposure to assetbacked securities, having for some time been shying away from the asset class. With the Australian mortgage market they have learned the lesson that, while there are risks, there is not the same kind of principal loss experienced in US sub-prime. I would describe our clients’ return to participation in these markets as ‘baby steps’.

In the US we are seeing quite a lot of supply in the auto-loan sector and a little in credit cards.

But that involves a degree of concentration risk so, with our global presence, we have the expertise to LEFT TO RIGHT: Andrew Twyford, Arkady Lippa, Paul Garvey, John Barry look at alternatives – like Australian mortgages. ◆ paez Given the way we manage our structured finance ◆ Barry We are trying to build the level of engagement. There portfolio, we are constantly looking for ways to diversify or is a process of re-engaging with the US market – we’ve had further improve the quality of the portfolio, and Australian some success but it is early days. Prior to the financial crisis RMBS can provide those types of opportunities. There is merit about half the volume of Australian RMBS issuance was going to the product regardless of the supply void in the market. offshore and a great deal of that was denominated in US Having said that, investors dollars, so many of the parties are undoubtedly looking we talk to are historical buyers aggressively for other sources with the necessary level of “Australian households have of assets because the product analytical capability and global taken note of the challenges void is massive. It will be a long presence. in Europe and the US, and are time before domestic issuance One interesting aspect is undoubtedly deleveraging gets back to pre-crisis levels. around the UK master trust There are sectors that were structure. We get consistent themselves as a consequence. clearly oversupplied, so in feedback from offshore More of our borrowers some cases we may never get investors that there is a desire are getting ahead of their back to those levels. to minimise extension risk repayment schedules by To my mind there is a in structures. We have seen making greater-than-minimum window of opportunity for the success of UK issuers non-US issuers to come to this in tapping the US market, payments.” market as a stable source of particularly with short-end Andrew Twyford National Australia Bank funding. If issuers come to the 2a-7 paper, through their US with programmatic issuance RMBS master trusts with bullet plans and make the effort to develop investor relationships, I and controlled amortisation tranches tailored to mitigate think they will achieve something positive for their funding extension risk. strategies. There are opportunities for offshore borrowers to Because of regulatory uncertainty surrounding a couple of establish themselves as stable issuers in the US – as we are structural elements of master trusts they have not become a seeing in the case of a number of borrowers from the UK. feature of the Australian market. To create hard bullet tranches of a reasonable thickness out of standalone closed vehicles we have had to devise other structural techniques. To date, Davison What sense do borrowers and that has meant a combination of re-issuance of short-dated intermediaries have about the sustainability of demand for Australian paper from the US – and securities and facilities backing the redemption of notes. That is working, but these structures are different from the master how important is the belief that the investor trusts that many offshore investors are familiar with. It would base will be supportive over the long term?

19

roundtable

◆ Lippa

We have found that there are a number of investors – two of whom are taking part in this discussion – who partner with issuer and intermediary in the deal process, which is fantastic. There is also a broader group of investors who only look at deals when they are live. That’s why it is particularly important for issuers to engage with the investors who will support their approach to the market: it gets them to the point where they are able to get the interest of the larger group of investors.

Davison Andrew Twyford,

John Barry, National Australia Bank

when NAB does investor relations work in the US is the bank talking to the same investors about different asset classes or are there discreet groups?

Paul Garvey, ME Bank

certainly be preferable if we had the master trust technology available to us. ◆ Garvey ME Bank has been quite lucky in that we have had ◆ Twyford It’s a blend. Some investors have a preference for an established offshore programme – we are a Securities and senior unsecured while others are happy to look at covered Exchange Commission-registered issuing entity. We hold the exposure as well, or may prefer it. Having the opportunity to view that we need to diversify our funding sources, particularly hold non-deal roadshows at which we discuss a broad range into offshore markets, which takes a lot of time and effort as of opportunities tends to provide the greatest scope to get well as partnership with an investment bank to help us bring maximum interaction. deals to a market that has a degree of complexity.

Master Trusts We most recently “One of the reasons investors roadshowed to US investors in Davison John Barry sometimes prefer covered January 2012 and that gave us alluded to a US bonds over standalone RMBS is a degree of comfort that there investor preference for the additional liquidity. I think was genuine interest in our bullet maturities in product. The investors that RMBS, especially those master trusts would help with participated in our book in provided by master liquidity and improve price April worked alongside NAB trusts. How important transparency.” and ourselves to get to the end are bullets?

John Barry National Australia Bank ◆ McCusker Extension risk outcome. This demonstrates the willingness of investors to has been a significant risk in engage with structuring over a our portfolio. We understand longer period than might have been the case in the past. the better fundamentals in the Australian mortgage market ◆ Twyford While the cost element of borrowing offshore versus what happened in the US, but what happened to extension risk – particularly when the Australian Prudential is, of course, a necessary ingredient in our thinking, NAB Regulation Authority made changes around call-date features – looks at offshore funding as an important part of the overall substantially changed our appetite. programme. It’s important to have diversification in our As a result – and I suspect this is the same for a lot of funding, and as an issuer of RMBS as well as covered bonds and investors in the same space as us – we look to minimise senior unsecured it is important for us to continue to do work extension risk or not have it at all. That means our demand is across asset classes. for bullet or controlled amortisation features.

Going forward, capability to execute matched funding What this entails is more homework on the originator through asset-based issuance will be an important tenet of any in terms of how it supports deals. In the UK the master trust post-Basel III prudent funding plan.

20 · Australian Securitisation Journal | Issue 02_2012

format – with the exception, of course, of Northern Rock’s Granite platform – has been successful in supporting controlled amortisation. ◆ Paez We think there is room for both pass-through and bullet formats.

Pass-through structures, and the contraction and extension risks you run in them, are a part of the asset class we participate in domestically.

Having said that, we see a tremendous benefit in having a master trust structure. It makes issuance more efficient and economic, and probably makes it more costeffective for issuers to come to offshore markets more frequently by reducing the cost of cross-currency swaps. From Arkady Lippa, National Australia Bank Andrew Twyford, National Australia Bank our perspective as an investor, it is very attractive to see issuers address needs in different currencies appealing than a bullet and different parts “there is a window of RMBS, or a covered of the curve. Without the bond? opportunity for non-us issuers ◆ Paez It may be a question master trust structure that to come to the us market as a is difficult to attain. We are better answered by the stable source of funding.” hopeful that a master trust borrower, but we assume it francisco paez metlife structure is approved and would be more efficient from a adopted in Australia. structuring standpoint to use a It is true that moving master trust than to structure to the master trust structure creates significantly greater a standalone bullet. Both accomplish a similar outcome, linkages with the RMBS sponsor than would be the case with though in the case of a master trust investors are relying on a standalone deal. From that perspective I don’t think master the sponsor to make the bullet work while it is likely to be the trusts are something that can be used wholesale by any structural features that support a standalone bullet. sponsor. But the larger and stronger sponsors would be very There are also a lot of similarities between master trusts successful using it. and covered bonds. Having a segregated pool as the sole ◆ Lippa The harder the bullet, the lower the additional swap source of repayment removes the complexity of a number of the contractual stipulations needed in covered bonds. That cost. When you are talking about a controlled amortisation adds some attractiveness to the RMBS product. But really they or bullet structure created via a master trust that swap cost are sufficiently similar that it would be a relative value call reduction can be quite dramatic. For a cross-currency swap between the two. provider who is able to price the extension risk of a swap that attaches to a security with a scheduled but not hard-wired amortisation profile, including soft bullets, the extent to which Davison The ability to offer master trusts they can rely on the defined schedule is the key variable in certainly appears to have supported the success pricing the swap. of UK RMBS issuers in

Davison The deal ME

Bank did in April has a US dollar-denominated tranche with a bullet maturity. What advantages does the master trust structure have that make it more

“our clients are displaying appetite for adding exposure to asset-backed securities, having for some time been shying away from this asset class.” pia mccusker state street global advisors

the US. What would that facility do for Australian borrowers?

◆ Barry Master trusts are very valuable for the discussed reasons of efficiency and flexibility. I don’t think they are a cure-all for the Australian issuer market, though. They

21

roundtable

“We understand the better fundamentals in the Australian mortgage market versus what happened in the US, but we look to minimise extension risk or not have it at all. That means our demand is for bullet or controlled amortisation features.”

Pia McCusker State Street Global Advisors

won’t do a lot for non-bank issuers, because of the linkage to sponsor issue and also because a significant degree of overcollateralisation is typically required for the sponsor to get the full benefits that a master trust can offer. It is also fair to say they are unlikely to offer much to Australian regulated entities that are seeking capital relief in RMBS. One of the reasons investors sometimes prefer covered bonds over standalone RMBS is the additional liquidity. I think master trusts – and their ability to build deep lines of stock – would help with liquidity and improve price transparency.

Time to market is also a key advantage of master trusts.

Using a master issuer platform means sponsors can respond very rapidly to favourable market conditions. Given the credit market volatility that we’ve seen, being able to take advantage of a window of opportunity or respond to a reverse enquiry without the need to set up a new vehicle each time, can be critical.

Overall, I believe master trusts would be a very important development for the Australian market. As an industry, we are talking to regulators about them and there is a degree of optimism that we can get traction on the issue.

On the issue of efficiency and cost for the issuer, if we look at the bullet structure in ME Bank’s SMHL deal the relevant area is the redemption facility. That would not be required in order to offer a bullet maturity out of a master trust. And on the swap side, the extent to which there is certainty around principal repayments certainly helps manage pre-payment risk and, as a result, contain the cost of cross-currency swaps. ◆ Lippa That’s exactly right. What ME Bank created in its last deal was in effect a proxy master trust. If the bank had the ability to use a de-linked master trust facility it would not have incurred the additional costs and it would be able to issue bonds across a range of maturities – all in US dollars, if so desired. There is the flexibility and speed to tap the market at any time out of master trusts, at any tenor and in any currency depending on where the issuer sees pockets of demand. Once it’s running it is a very efficient funding tool.

There is certainly a lot of interest in the structure in Australia, on the issuer and intermediary sides, and also for mortgages and, potentially, other asset classes too. The interesting thing is that, although there may have been some regulatory uncertainty around master trusts, they certainly 22 · Australian Securitisation Journal | Issue 02_2012

haven’t been explicitly prohibited in Australia – they have just never been taken up. One reason may be that Australian investors have never really familiarised themselves with the structure, but encouragingly we are now seeing momentum building across the industry.

Davison What do Australian issuers think about

master trusts?

◆ Garvey

Getting a master trust structure established is an important development. It provides a degree of flexibility in transactions that takes several months to complete in standalone format – as our recent issue proved. There are also a range of different tenors in which investors are interested and the master trust structure provides a degree of flexibility to meet specific demand. ◆ Twyford It takes the complexity out of structuring. ME Bank was successful at putting together its structure but there was a degree of complexity that I’m sure would have challenged some investors. Having the ability to offer what ME Bank did via a master trust platform would have given that bond a much easier path to market. Having the ability to use master trusts would be a significant fillip to the market. Anything that can add flexibility and reduce complexity will help us develop the investor base for this product. ◆ Lippa In the last NAB RMBS deal in 2011 there was also a US dollar tranche, with a two-year soft bullet maturity. That carries an element of increased extension risk that master trust issuance largely does not have. Again, it would add to investor certainty and reduce swap costs. ◆ Garvey I think the industry is in an interesting position.

There are investors who want alternative structures and we as issuers have to come up with solutions to that demand.

I believe a lot of issuers are perfectly capable of issuing amortising structures but I’m not sure enough effort is going into looking at alternatives. Perhaps the time commitment is a step too far for some issuers. But there is certainly a shift by investors to seek alternative structures and to engage with issuers about these structural alternatives in advance of a securitisation deal.

Davison The added complexity of doing cross-

currency swaps on principal pass-through, as

Subordinated sales likely a long-term goal recent placement of Australian residential mortgage-backed securities (RMBS) into the US has only involved the highest-rated tranches of deals. While investors in the us are not opposed to subordinated notes in concept, a degree of additional familiarity with Australian product is likely needed before demand emerges further down the capital structure.

Davison How realistic are the prospects of finding offshore investors for Australian mezzanine and subordinated RMBS tranches?

McCusker I am not in that space but

I think in all likelihood where the ratings agencies are with lenders’ mortgage insurance (LMI) and counterparty assessments makes it difficult for mezzanine investors if they are at all ratings sensitive.

Changing methodologies mean you don’t know whether you are buying a single-A bond that will be double-B the next minute because LMI was downgraded without any consideration to the structure.

Paez From our perspective there is nothing in the concept of junior tranches that would be an impediment to participating. It is a learning process for investors to start buying Australian product, and we certainly want to be able to walk before we run. Once investors get to know the market well they are more likely to be willing to explore a wider range of options.

I don’t see why we would not look at that kind of investment further down the road, though it would really be a question of structuring. Ratings volatility is an issue, although we are not terribly ratings sensitive – in our case it is more about fundamental analysis as we don’t have ratingsbased mandates. Lower credit enhancement also makes Australian product more challenging, but again there’s no reason this can’t be resolved through some element of structuring.

Garvey I think it remains quite a challenge to sell lower-rated tranches outside Australian dollars, given the pre-payment risks for the swap and the consequent cost and volatility for the cross-currency hedge.

Domestically we have found that there is beginning to be more interest in lower-rated tranches from nontraditional investors. For our latest transaction we had direct enquiry to us and actually placed bonds directly with self-managed superannuation funds and high net worth individuals.

Those sources of liquidity might in the past have come through funds management channels, but they are now going through alternative avenues to make direct investments.

Davison Does this imply that Australian borrowers would be better advised to direct their efforts to finding new domestic investors in junior tranches rather than looking offshore?

Lippa Yes, that makes sense for

domestic investors and some of the offshore buyers who are comfortable with Australian dollars, and potentially for regions other than the US. The disclosure requirements of US dollar

issuance mean that if a borrower found a US dollar subordinated or mezzanine bond buyer they would likely have to offer it in 144A or SEC registered format, and that increases the workload quite dramatically. An Australian dollar offering in Reg S format would be more likely to work for domestic and offshore investors.

Barry Domestic demand for mezzanine and subordinated tranches remains concentrated among quite a small group of buyers, although we are continuing to try to expand that buyer base. It is definitely a worthy cause to try to tap into offshore investors but I think it will be a challenge. In the end it will be investors who are comfortable with the underlying pools and the quality of the servicer, and who have formed a view on the sufficiency of the first loss and the benefit of LMI, who participate.

In the recent Pepper Australia non-conforming transaction we were able to sell specialist loan-backed paper, without LMI, to offshore investors right down the capital structure to single-B notes. That gives us some cause for optimism, though there are clearly still challenges.

“The disclosure requirements of US dollar issuance mean that if a borrower found a US dollar subordinated or mezzanine bond buyer they would likely have to offer it in 144A or SEC registered format, and that increases the workload quite dramatically. An Australian dollar offering in Reg S format would be more likely to work for domestic and offshore investors.”

Arkady Lippa National Australia Bank

23

roundtable

Swapping one challenge for another cross-currency swap execution for amortising residential mortgage-backed securities (RMBS) transactions is helping keep Australian activity in the short end. Mark Aarons, National Australia Bank (NAB)’s Head of Derivatives Solutions, explains the main issues.

Davison What are the issues for cross-currency swaps on amortising RMBS deals?

Aarons There are four key components: pre-payment risk, contingent funding value adjustment (FVA), credit risk and extension risk.

We quote the four charges separately to give full price transparency.

Pre-payment risk exists even in scheduled-amortisation trades and, especially, in pass-through trades.

We have done quite a bit of work on pre-payment and tranche modelling to get a good handle on the extent of the risk, both on the underlying RMBS and on the derivative overlaying it.

Understanding the expected future rehedging cost is critical. Two of the key drivers of this are the expected prepayment trajectory and the expected pre-payment volatility.

The new rating agency downgrade clauses which drive the contingent FVA charge – or NAB’s expected cost of posting collateral if the bank is downgraded – is also a significant

factor. It’s not just the mark-to-market value of the swap which needs to be posted, but also a hefty volatility buffer. Many of our competitors, who are closer to ratings triggers, will have to charge a lot for that while we believe we have a competitive advantage as an AA- rated bank.

Having said that, innovative structures can substantially mitigate this cost.

The potential extension risk if there is a call feature in the underlying notes is something we have to price very carefully – but there are some innovative ways of structuring stepups which can reduce upfront cost.

Davison Why is it cheaper for Australians to issue US dollar RMBS with shorter tenors?

Aarons There are several factors: the steepness in the credit premium as a function of term, the steepness of the bills/Libor spread curve and also the fact that the shorter the term, the less pre-payment-driven swap re-hedging there is likely to be.

opposed to bullet, securities has been mentioned.

How much of a challenge is that? ◆ Twyford

It depends on the structure of the individual bonds: straight amortising, controlled amortising or bullet. Amortising structures add complexity, and these days complexity can equal cost. If you are issuing a passthrough structure with a requirement for a full of balanceguaranteed swap it will be much tougher to make it economic in today’s environment.

That’s why the work that has been done by the likes of NAB’s debt capital markets team, to build the market offshore by clever use of soft and hard bullets and controlled amortisiation, allows hedging work in the most efficient possible form. That is a very useful approach for issuers. ◆ Barry We have established that there is demand in the US for Australian RMBS across a range of maturities. More recently, we have focused on money-market accounts with 24 · Australian Securitisation Journal | Issue 02_2012

Davison How have you been able to assist Australian borrowers with swap cost?

Aarons We like to see ourselves as solution providers, working with the client to assess various tranche and swap structure options to optimise the outcome. We are not just here to execute! We have implemented a number of innovative structures, including NAB’s own RMBS issue in 2011, which have materially reduced the cost compared to traditional approaches.

Davison What is the likely impact of new derivatives rules?

Aarons There are a lot of issues around regulatory capital for risk.

Central clearing also has implications.

But I think it is the rating agencies as much as the regulators that have a big say in the securitisation swap market: they are driving the downgrade criteria and that is a big driver of the FVA component of swap cost.

one-year bullets because the arithmetic does not work for longer maturities – a function of the credit spread to Libor, and also because of the cost of the swap. The element of that cost that is growing in significance is the inherent swap provider downgrade risk and the associated collateral requirements that the swap provider has to price for.

Davison How much of a challenge is the reduced

credit quality of banks globally, in terms of the availability of swap counterparties?

◆ Barry That puts the Australian banks in quite a strong position thanks to their good credit ratings. But issuers are dealing with fewer and fewer counterparties, which is probably negative from an execution standpoint. ◆ Garvey It is useful to work with a bank, as was the case with NAB on our last deal, which provides a whole-of-transaction solution. That includes both the deal structure and the swap

side. Some banks can provide one of those but not the other, and I think it will be a competitive advantage for the intermediaries who can provide both.

Australia’s economy Davison Australian

“Investors want alternative structures and we as issuers have to come up with solutions to that demand. I believe a lot of issuers are perfectly capable of issuing amortising structures but I’m not sure enough effort is going into looking at alternatives.”

borrowers say the Paul Garvey ME Bank questions they are most commonly asked by global investors – in addition to ones about Australia’s offshore funding reliance and ties to China – are about the housing market. Do US investors worry about the Australian housing market, especially the fact that it has yet to experience a large correction?

◆ McCusker Naturally we monitor the headline news about issues like the commodity boom, the two-tier economy, concentration in the banking system and reliance on wholesale funding. Those risk factors are undoubtedly out there, but we also look at the fundamentals of origination and underwriting in Australia that have stood up over time.

The risk is a jump in defaults caused by a significant change in house prices or unemployment, but even that is offset by the amount of dry powder the Australian government has at its disposal. Public debt to GDP is among the lowest in the world and 10-year bond yields are still very comfortable, so there are sufficient mitigants to any concerns that I am comfortable having RMBS exposures in Australia. ◆ Paez I agree with all those points. When you look at house prices in Australia for the first time it is somewhat shocking how expensive they are compared with many other economies, on an absolute basis at least. When you consider what happened with home prices in the US, the UK and other places there is clearly a very different trend line for Australia. But looking beneath the surface you start to see reasons for the differences: the Australian market is driven much more by structural factors than by speculation or loose underwriting.

which makes the Australian mortgage market much more resilient to housing price corrections. ◆ McCuskerOne thing that took me by surprise when I did due diligence in Australia was the extent of claw-back features established on brokers’ commission in the event of a borrower starting to deteriorate. The regulation of the mortgage market is a huge plus, certainly compared with the US.

Davison What comparisons would US investors

make between the credit quality of RMBS product they are offered from UK issuers and Australians? One issue that has been raised is Australian product’s lower levels of credit enhancement.

◆ Paez Credit enhancement is obviously a key component of any analysis and it is markedly lower, at least as a starting number, in Australian product than it is in the UK equivalent.

There are mitigants, though: the turbo structure where there is sequential pay until a significantly higher credit enhancement target is reached is certainly helpful, as is the double underwriting provided by lenders’ mortgage insurance. ◆ McCuskerThe revolving nature of the mortgage pool underlying master trusts demands additional credit enhancement. Those pools will have more mortgages with less seasoning than a standalone trust, which is why the latter can offer lower enhancement.

Davison To what extent can good mortgage underwriting standards offset economic shocks? ◆ Paez

If you look at the levels of loan-to-value ratios (LVRs) on Australian mortgage loans they are nowhere near what we see in some other developed markets.

That provides tremendous shock absorption capability,

Arkady Lippa and John Barry, National Australia Bank 25

roundtable

Regulation and reporting in a cross-border world The issues of new regulation and investor requirements for deal disclosure are challenges even for residential mortgage-backed securities (Rmbs) transactions issued and bought within a single jurisdiction. The complexities of cross-border deal flow add to the task – though there is a degree of comfort that there are no insurmountable issues.

Davison How important are Dodd-Frank and other regulatory changes when US investors look at offshore securitisation?

Paez We have to see what the

final regulations related to DoddFrank look like. A lot of what is in the law regarding securitisation is investor protection, for instance the risk-retention rules. We are seeing issuers out of Australia already retaining significant risk, so from that perspective they already meet one aspect of the Dodd-Frank Bill. But overall, I think we need to wait and see what the final regulations will be.

Barry One question we have been asked is around whether the market needs more or less regulation. The Australian regulatory environment has proved very effective throughout the crisis era, with the conservative stance of the local regulators serving us well.

The challenge is around the sheer volume of regulatory change and the difficulty engendered by the uncertainty involved. I’m sure the market will adapt to new regulation,

but ideally what we need is more regulators harmonisation between Australian and international rules.

We certainly want to avoid a situation like the one that has occurred in Europe where regulations are biased against securitisation product and in favour of covered bonds.

Davison Is it particularly challenging to be in a country like Australia which will take a regulatory lead from larger global markets?

Lippa That’s exactly right, and on a number of fronts. Although some of the new regulatory regimes have already become effective, in many cases we don’t know what the final version of US or European rules will be. And there is also the Australian domestic piece – including skin-inthe-game requirements which are still emerging. It is a real challenge for issuers to operate in this kind of environment.

Barry The concern would be if there

is a disincentive to issue into the US

Davison What feedback do issuers get from the

US about Australian credit?

◆ Garvey It doesn’t vary too much from what we have just heard. There are some economic challenges domestically but Australia is well positioned to deal with them, and the feedback we received at our January roadshow was very good.

The mitigants that have been discussed – such as low arrears, low LVRs and conservative lending guidelines – have been important themes that have come out in our investor engagement. The regulatory and legal framework in Australia is also regarded as important, and it has aided our reception in offshore jurisdictions to have rules like recourse back to mortgage borrowers. ◆ Twyford There is a good level of understanding throughout the globe given the access investors have to

26 · Australian Securitisation Journal | Issue 02_2012

because, for example, the final DoddFrank rules make it overly difficult for Australian issuers to comply and have no mutual recognition of Australian regulation. We’re optimistic that a sensible outcome will be achieved, but we will have to see how that plays out.

Davison What are the complexities of structuring RMBS to include both US and Australian dollar tranches?

Garvey The complexities are crossjurisdictional. There is often no uniformity from investors on what information they need. The jurisdictions that are more advanced on the regulatory front are clearer, but for those with regulation change still in progress the information demands from investors are less consistent.

Lippa In the case of ME Bank’s April deal it was almost like running two separate transactions: one offshore and one domestic. Differing disclosure requirements – as well as time zones and market conventions, of course – have always been there but they

information and analysis, and the opportunities they have to speak with issuers. I expect investors in the US, Europe and Asia would have had the chance to speak to numerous Australian financial institutions and those that choose to do so will hear fairly consistent information.

The fundamentals in Australia remain strong. It is important for Australians to continue to repeat the message that there are key distinguishing factors in our marketplace that have allowed us to be in the position we are in now. It is not all by fluke that the Australian mortgage and secured lending markets have performed so well over the crisisperiod. ◆ Barry It is true that there has been a recurring question over recent years about Australian property prices and whether they are set on course for a correction. It is the

have become much more challenging because they now cover a broader range of factors.

Garvey One of the challenges we

found on the deal was that, being one of the first to re-engage with US investors and under significant regulatory change, we were trying to navigate a legal interpretation without established market conventions. That was quite difficult.

underlying pools. That certainly helps us get a good sense of the nature of the collateral and to uncover any layered risk that isn’t necessarily shown in summarised information.

In general, Australian issuers are pretty open to working with investors and providing the information we look for. There is also a good standard of ongoing information.

In terms of areas where I would like to see more information, ideally I

willingness from Australian issuers to work with investors on these.

Garvey There is a time and cost commitment involved in structuring deals to meet investor demand, and standardisation of disclosure and reporting across jurisdictions would improve the situation. Engaging directly with investors helps to get a greater understanding of investor expectations, but this could vary

“When we are looking at Australian RMBS transactions many, if not most, issuers are willing to provide loan-level information on the underlying pools. That certainly helps us get a good sense of the nature of the collateral and to uncover any layered risk.

In general, Australian issuers are pretty open towards working with investors.”

Francisco Paez Metlife

Davison What do US-based investors expect in terms of disclosure and reporting in RMBS, and how do Australian issuers match up to these expectations?

Paez When we are looking at

Australian RMBS transactions many, if not most, issuers are willing to provide loan-level information on the

would like to see all disclosure made available through mechanisms that help standardise the process rather than doing it on an investor-by-investor basis. On an ongoing reporting basis it would be helpful to see information delivered through some of the cash flow modelling platforms more widely used around the globe.

There is still some work to be done in terms of reporting, but I certainly see

fundamentals that we talk about: we have a fully-priced market and high household leverage, but we are also experiencing strong population growth. There isn’t an oversupply in the market in general, and where there is – like south-east Queensland – there has been correction.

With the US in particular we have spent a lot of time educating investors on the differences between our mortgage market and theirs. That includes themes like the full-recourse nature of Australian loans, the fact that our loans are non-tax deductable – which encourages rapid repayment – and the fact that we have not had the decline in lending standards experienced in the US. The feedback from US investors is also that they are very comfortable with Australian regulation. ◆ Lippa There is also a perception that Australia has a highquality banking system, which is extremely helpful – and,

across the range of investors.

Once we know the disclosure requirements and investor needs, we are happy to accommodate them. mccusker We worked with UK issuers

to ensure their modelling of deals was in Intex as it is important for us to have that. We want to ensure that Australian transactions are also modelled accordingly in Intex.

from our perspective, well-deserved! Offshore investors appear to welcome the involvement of Australian banks in deals as mortgage underwriters or as support facility providers. In the flight-to-quality environment that has emerged in recent times Australian issuers have been able to benefit from this. ◆ Twyford Australian households have taken note of the challenges in Europe and the US, and are undoubtedly deleveraging themselves as a consequence. More of our borrowers are getting ahead of their repayment schedules by making greater-than-minimum payments, which gives them a greater buffer should additional pressures emerge. That puts the Australian property market in a stronger position, and offers the potential to cushion any short-term slowdown in the economy. ■ 27

co-published feature

LESSONS FOR THE AUSTRALIAN SECURITISATION MARKET FROM THE PERPETUAL LITIGATION Two of the partners at Sidley Austin who acted for Perpetual Trustee Company discuss the implications of the company’s litigation against Lehman Brothers and BNY Mellon for the Australian securitisation market.

By Simon Fawell and Robert J. Robinson

I

n December 2010 Perpetual Trustee Company (Perpetual) successfully reached agreement with Lehman Brothers Special Financing (LBSF) and BNY Mellon Corporate Trustees (BNY) to end the well-publicised litigation between them concerning notes issued as part of the Dante credit-linked note programme. More than a year after that settlement, other Dante noteholders remain in litigation to enforce their rights.

The Perpetual litigation has significant implications for the Australian securitisation market, particularly given the extent to which the Lehman Brothers group was embedded in Asia and the Pacific and the prevalence in structured finance transactions of the ‘flip clauses’ at issue in the litigation. This article considers the practical lessons that can be taken from the Perpetual proceedings.

Background to the Perpetual litigation On 13 May 2009 Perpetual commenced proceedings against BNY in the English High Court to enforce the rights of retail 28 · Australian Securitisation Journal | Issue 02_2012

investors in Australia, New Zealand and Papua New Guinea who held Dante notes, for which BNY acted as trustee.

The Dante programme was sponsored by the Lehman Brothers group and the notes, issued by numerous special purpose vehicles, were backed by an ostensibly safe, liquid investment security and by collateralised credit default swaps with LBSF. Many Dante note issues were originally assigned credit ratings higher than those of LBSF. Although the transaction documents were expressed to be governed by English law and conferred jurisdiction to the English courts, LBSF launched its own proceedings against BNY before the US Bankruptcy Court for the Southern District of New York (the US Bankruptcy Court), which is the first-instance forum for the Lehman Brothers bankruptcies in the US. Later on the same day it voluntarily joined the Perpetual-BNY proceedings in England. Perpetual was never joined to LBSF’s case against BNY in the US. Separate proceedings were later brought in England by the ‘Belmont Noteholders’, a further group of Australian holders of Dante notes. The Belmont Noteholders’ claim proceeded before the English courts in tandem with Perpetual’s claim.

LBSF commenced separate proceedings in the US Bankruptcy Court in respect of the Belmont Notes, but those proceedings were judicially stayed. The Belmont Noteholders moved for withdrawal of the case from the US Bankruptcy Court in February 2012 and, as recently as April 20 2012, LBSF filed its brief in opposition to such withdrawal. The purpose of the Belmont Noteholders’ application to withdraw appears to have been to accelerate appellate review of the US Bankruptcy Court’s ruling that flip clauses violate US bankruptcy law.

‘Flip clauses’ disputed The key question in the litigation was the validity of so-called ‘flip clauses’ under English law and US bankruptcy law. The relevant clauses provided for a reversal (flip) of the priority of payments between LBSF, as swap counterparty, and noteholders under a standard waterfall provision upon the occurrence of a swap default for which the swap counterparty was the defaulting party.

Absent such occurrence, LBSF’s claim on the collateral would rank in priority to any noteholders’ claim but, following any such occurrence, the claim of noteholders would rank in priority. Such a default had occurred under the swap as a result of, among other things, the bankruptcy filing of LBSF’s parent company and, later, LBSF’s own filing in the US Bankruptcy Court.

LBSF argued in England that the flip clause was ineffective as a matter of English law as it offended the ‘anti-deprivation rule’, which seeks to prevent the improper deprivation of assets from an insolvent debtor’s estate on bankruptcy. Before the US Bankruptcy Court, LBSF contended that the flip clause offended the US Bankruptcy Code’s ‘automatic stay’, as well as the code’s prohibition against ‘ipso facto’ clauses (i.e. contract

P erp e tu a l Li ti g a tion Timeline Sep 16 2008

Lehman Brothers Holdings Inc files for Chapter 11 bankruptcy protection in the US.

Oct 3 2008

LBSF files for Chapter 11 bankruptcy protection in the US.

Dec 1 2008

Early termination notice served by Saphir in respect of the swap with LBSF, linked to the Perpetual notes.

May 13 2009

English proceedings commenced against BNY by Perpetual.

May 20 2009

LBSF voluntarily joins English proceedings.

May 20 2009

US Bankruptcy Court proceedings relating to Dante notes held by Perpetual commenced against BNY by LBSF.

Jun 9 2009

English proceedings commenced against BNY by Belmont Noteholders.

Jul 28 2009

Judgement of the English High Court in Perpetual and Belmont cases, ruling that the relevant ‘flip clauses’ were enforceable.

Nov 6 2009

Judgement of the English Court of Appeal confirming the July 28 2009 judgment of the English High Court.

Nov 24 2009

Recognition of LBSF’s US bankruptcy proceedings as ‘foreign main proceedings’ under English law.

Jan 25 2010

Decision issued by Judge Peck of the US Bankruptcy Court in LBSF’s case against BNY, ruling that ‘flip clauses’ are unenforceable.

Sep 14 2010

US Bankruptcy Court adversary proceedings relating to Dante notes and similar securities held by (inter alia) Belmont Noteholders commenced against BNY (among other trustees) by LBSF.

Sep 26 2010

US District Court appellate Judge McMahon provides an indication favourable to Perpetual’s position.

Dec 2010

Perpetual agrees settlement with LBSF and BNY.

Jul 27 2011

Judgement of the UK Supreme Court confirming the 2009 decisions of the English High Court and English Court of Appeal in the Belmont case.

Feb 17 2012

Belmont Noteholders move to withdraw LBSF’s US adversary proceedings against BNY relating to their Dante notes.

SOURCE: SIDLEY AUSTIN MAY 2012

provisions disadvantaging a bankrupt debtor by virtue of the fact of its bankruptcy).

First the English High Court1 and then the English Court of Appeal2 determined that the flip clauses did not offend the anti-deprivation rule and so were enforceable. The US Bankruptcy Court, however, determined3 that the flip clauses were unenforceable as they violated both the automatic stay and the prohibition on ipso facto clauses.

This disparity in judicial rulings created a conflict for BNY because it was unclear how the decisions in England and the US would be reconciled, despite preliminary court-to-court communications.

The decision of the US Bankruptcy Court was eventually appealed and, following encouraging comments from the appellate judge when granting permission to appeal, Perpetual was able to negotiate a settlement with LBSF and BNY. The Belmont Noteholders did not, however, agree settlement terms with LBSF and BNY and, although they have since obtained a judgement of the UK Supreme Court4 that the flip clauses are enforceable under English law, they have yet to receive a distribution of the collateral due to the conflicting position under US bankruptcy law. The Belmont Noteholders continue to pursue litigation in the US in an effort to obtain a judgement overturning the US Bankruptcy Court’s adverse ruling on the flip clause.

Lessons for the Australian securitisation market The collapse of Lehman Brothers has provided a stark reminder that no enterprise is free of insolvency risk and that no market is an island, sheltered from the risk of participants

being entangled in complex cross-border litigation in other jurisdictions.

Transaction parties must therefore give full consideration at the outset of a deal to the possibility of insolvency events and their ramifications and also to where pertinent matters may be litigated.

The Perpetual litigation has highlighted the potential gravitational pull of the US Bankruptcy courts and their assertion of jurisdiction over disputes with insolvent, internationally-active debtors even in the face of both contracts expressly governed by English law and subject to the jurisdiction of the English courts, and English court proceedings which had already been commenced to adjudicate the same issue.

Although it is possible that a route will be found through the conflicting judgements, it appears that significant further effort will be required of the Belmont Noteholders before such a path can be found. Both the US Bankruptcy and English courts were careful to decide only the position on enforceability under their respective laws, without determining which law would govern in the event of a conflict.

If the decision of the US Bankruptcy Court is not overturned and no settlement is reached in the Belmont case, the respective courts will need to make a decision on primacy.

It is crucially important in such a setting to be prepared for counterparty insolvency, as decisions will need to be made quickly that will shape the strategy for dealing with the default both in restructuring or settlement negotiations and in the courts. In particular, being able to act swiftly may allow a party to seize jurisdiction in the forum most favourable to it.

Although proceedings were later commenced by LBSF in the US 29

co-published feature Bankruptcy Court, Perpetual’s position was helped by the fact that proceedings were already underway in England, where the finding was likely to be favourable.

To act effectively following a default, it is equally important for a party to have a working knowledge of the status of the collateral and also key transaction terms including enforcement and termination provisions. In order to enforce its security, it was necessary for Perpetual to follow a precise sequence of steps to ensure that it was at all times working within the transaction documents’ confines.

As has been seen from many other cases arising from the Lehman Brothers collapse, failure to follow precise contractual terms when enforcing a security or terminating a derivative transaction can be fatal to the ultimate claim. Likewise, action in cross-border litigation that is untimely, or that betrays unawareness of procedural requirements at each point in time, can undo even the best of underlying factual positions.

Finally, it is essential that parties be proactive in assessing and enforcing their rights. Perpetual’s position was improved

significantly by the fact that, in promptly proceeding against BNY in the English courts, it took the initiative both before LBSF commenced proceedings in the US and before LBSF’s bankruptcy proceedings were formally recognised in England (the latter giving rise to a stay on the commencement of litigation against LBSF in England). The favourable results achieved by Perpetual provide a bright counterpoint to the protracted battle in which other businesses and investors have found themselves caught up. ■

Simon Fawell and Robert J. Robinson are partners in the London and New York offices, respectively, of Sidley Austin LLP. Sidley Austin LLP acted as solicitors of record for Perpetual Trustee Company Limited in the English litigation described in this article. Views expressed in this article are exclusively those of the authors and do not necessarily reflect those of the firm or its partners.

1. Perpetual Trustee Co Ltd v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc: Belmont Park Investments Pty Ltd & Ors v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc [2009] EWHC 1912 (Ch); [2009] 2 BCLC 400.

2. Perpetual Trustee Co Ltd v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc: Belmont Park Investments Pty Ltd & Ors v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160; [2010] Ch 347.

3. Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Limited (Lehman Brothers Holdings, Inc.), 422 B.R. 407 (Bkrtcy., S.D.N.Y. 2010).

4. Belmont Park Investments PTY Limited (Respondent) v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc (Appellant) [2011] UKSC 38; [2012] 1 AC 383.

ASJ

Third edition of ASJ to be published in October 2012

The ASJ is the official bi-annual magazine commissioned by the Australian Securitisation Forum (ASF) and published by KangaNews. Issue 1 was published in November 2011. The current issue will be distributed at Global ABS 2012 in Brussels in June, as well as bespoke events in Asia arranged by the ASF. The magazine also has a targeted mailing list to securitisation investors and other market participants around the globe.

Issue 3 will be published in October 2012. It will be distributed at the ASF’s annual conference in Sydney, the American Securitization Forum’s annual conference in January 2013, and the targeted mailing list.

To register your interest in receiving a copy of the ASJ or to discuss sponsorship opportunities, please contact Brydie Wright ◆ bwright@kanganews.com ◆ +61 2 8256 5566

Greg Tanzer Commissioner, Australian Securities and Investments Commission

spotlight on asic Together with the Commonwealth Treasury, the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) makes up the council of regulators in Australia. Greg Tanzer, commissioner at ASIC, outlines the commission’s work in the securitisation sector.

H

ow is ASIC building confidence in the securitisation markets?

One element of ASIC’s focus on confident and informed investors is gatekeepers. They play an essential role in the functioning of our financial system. Investors depend on a host of gatekeepers in the securitisation sector – such as credit rating agencies, trustees and auditors.

ASIC has required gatekeepers to hold an Australian Financial Services (AFS) licence since January 2010.

In December 2011 ASIC released an information sheet that specifies new reporting requirements for rating agencies. If they operate in Australia they must lodge an annual compliance report with ASIC. This will assist ASIC in monitoring compliance with AFS licence conditions, including the mandatory obligation on rating agencies to comply with IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies.

The changes to rating agency regulation are aimed at better managing the inherent conflicts of interest in these firms and improving the quality of credit ratings.

key areas in relation to securitisation markets, including: ● Implementation of G20 principles and objectives1. ● Co-chairing the IOSCO Task Force on Unregulated Financial Markets and Products (TFUMP) together with the French AMF. ● Working with the peak industry body, the Australian Securitisation Forum (ASF), to develop securitisation standards.

◆ What are your key domestic priorities regarding securitisation?

ASIC has been working in a number of

◆ Now that the ASF’s residential mortgage-backed securities (RMBS) disclosure standards have been

◆ What are your priorities at an international level? How is your work with fellow regulators through IOSCO’s TFUMP developing and how are you managing the process of international harmonisation in a way that will not be detrimental to the Australian market?

It remains a priority of TFUMP to encourage the recovery of securitisation markets in a robust and sustainable way.

Australia is an active participant in these regulatory developments and we remain committed to these processes.

We will continue to consult with industry as TFUMP’s work develops and we encourage industry efforts to improve transparency through the development of their own disclosure and reporting standards.

q+a

approved and implemented, in your view should they be given regulatory backing?

ASIC supports the work of the ASF in implementing its RMBS disclosure standards, and we understand that the ASF is suggesting to industry that compliance with the standards should be by July 1 2012.

ASIC’s chairman, Greg Medcraft, spoke at the ASF conference last November and noted that he was “a strong supporter of self-regulation and industry standards are critical in terms of complementing regulation”. We are interested in industry’s views on the buy side and the sell side as to whether they believe regulatory backing is needed or appropriate. ◆ One critical issue ASIC has been addressing is the alignment of investor and issuer interests.

Are you satisfied with progress on this front?

ASIC has been closely monitoring international regulatory changes with regard to risk retention or ‘skin in the game’, and we are conscious of the need to ensure Australia’s regulatory regime is consistent with these changes to avoid regulatory arbitrage.

TFUMP made the recommendation for risk retention in its report released in September 2009, where it stated that regulators should “consider requiring originators and/or sponsors to retain a long-term economic exposure to securitisation in order to appropriately align interests in the securitisation value chain”. TFUMP continues to monitor regulatory developments in relation to risk retention practices.

We believe implementation of any risk retention requirements in Australia would need to be risk-sensitive and have regard to the quality of the underlying collateral. ■

1. The G20 commitment was: “Securitisation sponsors or originators should retain a part of the risk of the underlying assets, thus encouraging them to act prudently.” This originated from a recommendation made by TFUMP in September 2009.

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q+a

Navigating regulation: the central bank’s view With the birth of a new asset class coinciding with significant regulatory change regarding the liquid assets Australia’s banks can hold, the securitisation market is staring down the barrel of significant change. Guy Debelle, assistant governor, financial markets at the Reserve Bank of Australia (RBA), discusses the advent of covered bonds and how securitisation will slot into the funding mix for Australian banks in a changed regulatory environment.

D

o you foresee any progressive developments in the makeup of the committed liquidity facility (CLF) over time or will the initial version of the programme be maintained unless and until external developments make a change appropriate?

We have clearly established the eligible collateral for the CLF, which includes government bonds and paper from supranationals and other foreign governments, as well as debt and assetbacked securities, including residential mortgage-backed securities (RMBS), issued by authorised deposit-taking institutions (ADIs).

For the purposes of the CLF, the RBA will also allow banks to present certain related-party assets such as selfsecuritised RMBS. There are a number of reasons for this decision, but the primary

32 · Australian Securitisation Journal | Issue 02_2012

motivation is to reduce the systemic risk of excessive cross-holdings of bank-issued instruments. In terms of how much internal RMBS can be used, that will be the Australian Prudential Regulatory Authority (APRA)’s call. The information is now all out there and banks will negotiate their CLFs with APRA. Regarding the development of the CLF, the only scope for broadening is if new products emerge. If new instrument classes come along, in due course they will be considered. Covered bonds, for example, are eligible, although APRA still needs to come to a determination as to whether they are level two assets, which will be done when the asset class is a bit bigger. ◆ Do you anticipate the CLF will

have any impact on the established repo system?

No. Everything which is currently repo eligible with us is included in the CLF.

◆ Given the ratings decline of

a number of significant global sovereigns, has any thought been given to revising ratings standards for repo eligibility in any asset classes?

The impact of sovereign downgrades has only been at the margin with regard to repo-eligible assets: only a few names have been affected. Consequently, we don’t see any need at this stage to change our repo-eligibility criteria. We have just reviewed this and we are comfortable with our position. We aren’t going to chase issuers down the rating scale. ◆ What does the development of

the Australian covered bond market mean for the bank funding mix for regional and major institutions?

The relativities in pricing between unsecured and covered bonds and RMBS have been broadly maintained over the last six months. They have moved up and down together, so the market has a set idea of where the relativities should lie.

I anticipate covered bonds will be mostly used as an offshore funding tool by eligible banks – primarily the majors – as they tap a particular niche of investors. RMBS will become the primarily domestic securitisation vehicle.

We anticipate that banks will not issue covered bonds right up to the 8 per cent cap level – they will leave some buffer zone.

Covered bonds are contributing to the funding mix by enabling issuers to term out their funding. The covered product is generally between five and 10 years in maturity while RMBS is focused on three years, so the new asset class provides a real opportunity for maturity diversification.

In terms of the regional banks, they are reasonably well positioned. We may start to see covered bond issuance from some of these issuers and they will continue to use the securitisation market. Last year the non-major banks

were able to execute two to three deals each and they are on track to do the same again this year. The size of the recent ME Bank RMBS deal demonstrates the appetite for these names.

Regional banks have the ability to be opportunistic about their issuance and we expect to see them do so. Many second-tier RMBS issuers really ramped up their deposit funding in 2011, so they technically don’t need to issue senior unsecured. As a result, RMBS is a tool they can use when they want to.

However, issuers without a balance sheet as a source of funding are likely to face some challenges. ◆ To what extent will covered bonds

affect the overall cost of funding for Australian banks?

Even if issuance reaches the absolute regulatory cap of 8 per cent, covered bonds won’t be enough to make a material difference to overall funding costs. There are many other inputs into the cost of funding that are more significant. And any pricing gain obtained from issuing covered bonds is likely to be offset to some extent by a demand from unsecured debt holders for more compensation in the future. I see the role of covered bonds as primarily broadening the potential investor base rather than a means of reducing overall funding costs for banks. ◆ How comfortable is the RBA

with the quality of the collateral underlying RMBS? We have to be mindful of arrears rates on mortgages because it is collateral we sometimes hold as part of our repo facility. We monitor arrears through our middle office and we have no concerns around collateral at this stage.

Arrears rates have been going sideways for some time now. ◆ The major banks have done a lot

of work to maximise the component of wholesale funding they raise in

Basel III implementation and the clf In November 2011 the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) announced details of the committed liquidity facility (CLF) that forms part of Australia’s implementation of the Basel III liquidity reforms.

The Basel liquidity standard requires that banks have access to enough high-quality liquid assets to withstand a 30-day stress scenario, and specifies the characteristics required to be considered an eligible liquid asset.

The CLF – provided by the central bank against eligible collateral to enable banks to meet the liquidity coverage ratio (LCR) – addresses the issue of the marked shortage of high-quality liquid assets that are outside the banking sector in Australia due to low levels

AUD in recent years. Do you think the RBA or other independent bodies should provide incentives to guide banks’ funding mix?

In terms of product selection, if not the onshore-offshore currency split, the liquidity coverage ratio and the net stable funding ratio recommended

by Basel III provide incentives to term out, for example. While denomination of funding isn’t a priority here,

of Commonwealth and state government debt.

APRA will work with the banks to determine their overall liquidity needs, and will allow banks to reach an agreement with the RBA for a CLF for a specified amount, subject to RBA approval, to enable them to meet the balance of their liquidity requirement under the LCR. APRA may ask banks to specify the size of their access to the CLF as much as 12 months in advance. The facility will only be available for banks to meet that part of the liquidity requirement agreed with APRA. The RBA has set a fee of 15 basis points in return for its commitment to provide liquidity to a bank under the CLF. The fee will be paid on both the drawn and undrawn amounts.

these dynamics definitely affect the composition of funding by incentivising long-term funding and deposit funding.

But really a range of forces works to shape funding composition, apart from Basel III —including pressure from the market. So banks had already started down this path prior to Basel III. With all these forces working together, there is no real need for any more ‘official’ incentives. ■

“I see the role of covered bonds as primarily broadening the potential investor base, rather than a means of reducing overall funding costs for banks.”

Guy Debelle Rese rve Ba nk of Australia

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RMBS in the Australian domestic market: making sense of relative value and liquidity Commonwealth Bank of Australia (CBA) invited Australian issuers and investors to join a roundtable discussion to review trends in the domestic residential mortgage-backed securities (RMBS) market. In Australia these securities are finding their place in a market that has been shaken by price volatility and the arrival of covered bonds. The credit quality of the product has stood up well and issuers across the financial institution spectrum say they expect RMBS to continue to have a role.

For the buy side, adding certainty around liquidity is the key issue.

PARTICIPANTS ◆ Jeff Brunton Head of Credit Markets AMP CAPITAL ◆ Peter Casey Deputy Treasurer ING BANK AUSTRALIA ◆ David Hanna Senior Portfolio Manager MACQUARIE FUNDS MANAGEMENT ◆ Peter Hendry Head of Global Markets Institutional Sales, Fixed Income COMMONWEALTH BANK OF AUSTRALIA ◆ Simon Maidment Head of Group Funding and Execution COMMONWEALTH BANK OF AUSTRALIA ◆ Ben McCarthy Head of Structured Finance, Asia Pacific FITCH RATINGS ◆ Justin Mineeff Senior Vice President, Corporate Finance Securitisation COMMONWEALTH BANK OF AUSTRALIA ◆ Chris Plater Chief Investment Officer CHALLENGER LIFE ◆ Patrick Tuttle Managing Director and Chief Executive PEPPER australia MODERATORS ◆ Robert Verlander Head of Corporate Finance Securitisation COMMONWEALTH BANK OF AUSTRALIA ◆ Laurence Davison Editor KANGANEWS

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COVERED BOND IMPACT

Davison Has the arrival of covered bonds fundamentally changed the RMBS issuance and investment environment for the long term? ◆ Maidment From our perspective covered bonds are another arrow in the funding quiver. I don’t think they have supplanted either RMBS or senior bond issuance. Around a quarter to a third of our outstanding total debt can be in covered bond format but not more than that. So we will continue to be a senior issuer and we will continue to be an RMBS issuer.

In terms of the programme of funding we have undertaken in 2012, there was an emphasis in the first quarter on covered bonds. That was partly driven by the fact that we are in a ramp-up phase for that programme, which enabled us to do a higher-than-ordinary proportion of our funding in covered bond format.

It was also driven by the fact that we are trying to manage the overall cost of funding through a period of quite dislocated markets with wide spreads. As spreads recover, our propensity to do trades further out the curve and more trades in senior format – or RMBS for that matter – increases.

Looking back to January the cost of doing US dollar senior unsecured debt for an Aussie bank was 275 basis points over bills, and that’s just not palatable. So I certainly would not write off the RMBS market based on the activity covered bonds drew in the first quarter – in fact I think it was an unusual quarter. That’s true from the issuer and the investor sides.

For instance, while we thought a covered bond market would emerge in Australia we were pleasantly surprised by the extent to which the investor base accepted the product. I also think that was a function of spreads at the time. A lot of the feedback from last year was that investors wouldn’t buy covered bonds because they thought the spreads would be too narrow. ◆ Brunton I think Simon Maidment is right: it felt at the back end of last year a lot like the post-Lehman environment, where the funding market was shut and spreads were extremely volatile and widening. The secondary market relies so much on primary printing and the discipline that gives, so it was useful to kick-start the market again by the arrival of the new asset class.

We were of a mind that covered bonds would be used more offshore than onshore by Australian issuers. But the levels we saw at the turn of the year, for a triple-A asset, were very attractive. On the other side, for AMP Capital that pricing somewhat dislocated the way we think about senior unsecured and RMBS assets.

What does that mean now, with covered bonds at 115-120 basis points over bills? I don’t think covered in the longer term crowds out RMBS, but maybe it has for the short term as investors get a better handle on the relative liquidity that is

available in covered bonds, senior unsecured and RMBS. In the second quarter we have been a bit unimpressed with liquidity in all the asset classes, compared with 2010 and 2011.

Specifically, while I think liquidity in covered bonds and senior unsecured is acceptable, the liquidity issue is most apparent in RMBS. Back in 2010 and 2011 we thought we had an asset class that was tradeable, but if we try to move even modest parcels of RMBS today we have to face the fact that it is a brokered market. The liquidity that is offered for small parcels is 10-20 basis points back from where the primary market is trying to set levels. ◆ Hanna Covered bonds provide another instrument that investors can use in the high-quality space. The investment decision will be based on the best relative value offered between covered bonds, senior bank paper and RMBS. Liquidity risk will be a large driver. The liquidity premium as a percentage of the total risk premium offered on securities is at heightened levels and it has been for some time. We assess how much of that total risk premium is related to liquidity premium and allocate to securities accordingly, in tune with the underlying liquidity we are expected to have in individual mandates.

RMBS are great value if you don’t require liquidity.

Senior bank paper probably provides the best return-liquidity trade off because it provides more yield than covered bonds, although covered bonds tend to be the most liquid of the three securities.

Davison Do you think the RMBS liquidity situation is heightened because there has been a lack of primary issuance?

It could be, but the longer that stays the case the more it puts a big question mark over liquidity. There are also some unanswered regulatory questions around how RMBS may be treated within banks’ liquid assets facilities and I think that could be preventing answers to those liquidity questions.

◆ Brunton

Another aspect is that structurally there is a big difference between a multi-billion dollar bullet bond, which is what a covered bond is, versus an amortising RMBS. The RMBS is also likely at a discount right now so you’re probably taking much of it on the basis of pre-payment rates as well as the credit of the mortgage provider. Perhaps those are reasons why the asset class is less liquid once securities reach the stage of being part of a seasoned transaction. ◆ Plater

TRANSACTION RESPONSE

Verlander Peter Casey, ING Bank was the first issuer of prime RMBS in Australia this year.

What are your thoughts on the outcome of the transaction? ◆ Casey Before

the deal we were certainly wondering exactly what the impact of covered bonds would be. That was in terms of discovering the overall flavour of the market and whether we would be able to get investors’ attention. Similarly, we had to consider the price level – certainly covered bonds came to the Australian market at levels a lot wider than we expected, and that had repercussions for all funding instruments.

As the market settled down and the spreads on covered bonds tightened, we were very pleasantly surprised at the

“From a lead manager perspective we want participation in RMBS from fund managers as well as financial institutions. However, we also feel the market can be too quick to judge a deal by a perception of a lack of fund manager involvement.”

Robert Verlander Commonwealth Bank of Australia

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“Being a non-conforming or specialist lender means we can offer investors a lot more margin on the underlying loan portfolio and still achieve efficient funding.”

Patrick Tuttle Pepper Australia

take-up on our RMBS. There certainly seem to be investors who continue to have good appetite for this asset class and to differentiate it from covered bonds. Obviously the risks are different. But when the yield is higher than they could get on covered bonds they are happy to take the trade-off.

We had seven new investors to our programme in the deal, so certainly there is still demand. They may have been investors who predominately bought major bank RMBS paper and came to us because there hasn’t been much major issuance. We were very happy they came to our programme, but there has only been one prime deal subsequently so the test will be over the course of the year. If there is A$1520 billion (US$14.9-19.9 billion) of RMBS still to come, the question will be how that finds a home.

Verlander How significant was it that ING Bank offered a very simple RMBS structure? ◆ Casey Part

of the feedback was that we should make sure there was no reason for investors not to buy the issue, as far as we could. We kept the structure simple with straightforward collateral, we engaged investors well in advance to make sure we had a good-sized book, and we had a good idea of where it would price. ◆ Verlander From a lead manager perspective we want participation in RMBS from fund managers as well as financial institutions. However, we also feel the market can be too quick to judge a deal by a perception of a lack of fund manager involvement. This can be a double-edged sword because bank investors in particular are very knowledgeable about bank credit and RMBS, and to some extent they can get comfortable at a lower spread.

From recent deals I note that there is a push and pull in terms of getting a book together, where there is a temptation to ask the issuer to engage at a higher spread and by doing that attract a wider range of investor engagement. However, on the other side of that there is a fairly reliable base of financial institution investors that is happy to pay a relatively tight price. ◆ Casey I think that is fair comment. Having said that, the bulk of the money in RMBS deals at present comes from authorised deposit-taking institution (ADI) investors. It is true that by paying another 5 basis points we may have got a little bit more and that by paying another 25 points we may have got an extra 36 · Australian Securitisation Journal | Issue 02_2012

10-20 per cent to the trade, but we have to put the bank’s interests first.

Verlander Is there anything about deal books that issuing banks have seen recently, especially for covered bonds, that is fundamentally new – such as new investors or bigger tickets?

◆ Maidment The Australian dollar market is a closed market with three investor bases: domestic institutional investors, domestic banks and international investors. Looking at the Medallion RMBS transaction CBA did last year, we were incredibly pleased with the book, including the fact that we had two-thirds real-money distribution. Comparing that to the covered bond we did in January, the proportion was about the same.

Those are A$3-3.5 billion transactions, and from my perspective they both had good, well-distributed, welldiversified investor bases, which is one of the objectives we are trying to achieve while also trying to manage cost. We are not going to pay a substantial premium to attract a particular incremental investor base if that involves materially affecting the cost of funds to the bank.

Covered bonds help in the sense of accessing securedproduct investors who want bullet payments. In our experience, that is probably more influential with the offshore Australian dollar investor base, because there is still a reluctance to take pre-payment risk into a lot of those offshore Australian dollar portfolios. In that context I am talking about central bank investors and institutional Australian dollar money offshore. In terms of the overall covered programme, issuing in foreign currency is bringing in new investors that we wouldn’t ordinarily see in our senior unsecured issuance.

STRUCTURES AND SPONSORS

Verlander Patrick Tuttle, as a non-conforming RMBS originator what are your expectations for being able to secure funding for the mortgage product that Pepper Australia (Pepper) originates?

We are in the market right now, bringing a nonconforming RMBS deal. So we have live experience, and the feedback we have had has been extremely positive. We were last in the market in December 2010 so we think new Pepper issuance is overdue.

What helped us is that we had a lot of reverse enquiry that has come from the mezzanine investors interested in the more junior tranches of the capital structure; we tranche our

◆ Tuttle

deals right down to single-B “If liquidity is the core requirement, rated notes. We are one of only a handful of non-bank RMBS is never going to meet it issuers in Australia who because it’s not directly fungible can issue non-conforming between two different deals; each RMBS, and we have built one has to be underwritten.” up demand having called Chris Plater Challenger Life all our outstanding Pepper Residential Securities (PRS) deals since the beginning of the financial crisis – including PRS6 in December last year and conforming is a much more specialised asset and there is a lot more to get comfortable with in terms of the issuer, the PRS7 in early March 2012. We gained confidence, off the back of collateral and the structure. This lends itself to investors who that enquiry, that investors recognise our track record of calling are set up to develop that comfort. all our deals – hence the decision to bring PRS9 to market. ◆ Hanna From our perspective non-conforming is more The demand we are seeing is all coming from real-money investors. The encouraging part about our new deal is that sensitive to the economic cycle, and therefore will struggle we will also be able to remove the redemption facility that in times of stress. As an asset class typically originated by we had on our PRS8 issue – investors this time seem happy to non-banks, it is the most challenged part of the market. It buy the junior triple-A tranches without a redemption facility doesn’t have a natural fit in bank balance sheet portfolios and backstop, which is positive for our sector. I should stress that lacks natural support from the Australian Office of Financial there is nothing wrong with a redemption facility, but I’d Management. However, this environment means that some rather see a simple, traditional structure without the need for of these issues come to market with strong structures and bank balance sheet support. What we are offering is a fairly attractive pricing. straightforward structure and the demand has been good.

Being a non-conforming or specialist lender means we Davison It has been suggested that, in the can offer investors a lot more margin on the underlying loan prime sector, it may be tempting for issuers to portfolio and still achieve efficient funding. So we can go to offer more in spread to bring in additional real market thinking realistically about spreads relative to prime money. But the ability of mortgage pools to pay RMBS and still get an efficient deal done. a clearing margin has been limited. How close is The other pleasing aspect of our PRS9 transaction is the the market now from margins being at a level level of initial interest coming from offshore. We don’t feel where investors are tempted to come in to RMBS covered bonds are crowding out our part of the RMBS market. deals regularly? ◆ Brunton I would be surprised to learn that the prime mortgage origination world is not still profitable. Is there Verlander Chris Plater, are the sort of assets a problem underwriting mortgages at the current cost of Patrick Tuttle describes the kind you are liabilities versus the standard variable mortgage rate? looking for? ◆ Plater Our mandates are such that we can be predisposed ◆ Casey The point is at what stage the coupon on the RMBS, to lending in less liquid fixed income. We look to provide going down the structure, can’t be supported by the cash capital where there is a lack of it, and we see that this is very coming in. ◆ Brunton Our view is that the subordinated section of the much the case for non-conforming structures. Prime, bankoriginated RMBS obviously has a reasonable level of support, capital structure looks like high-yield risk rather than the and generally speaking there is a relatively liquid market current ratings quality it gets badged with by some agencies, for the securities which is reflected in their pricing. Nonthough they are all in varying stages of updating their

“We have lost a large swathe of offshore investors after the impact of the financial crisis on global Asset-backed demand, but even in terms of the domestic market it is difficult to see why there isn’t more demand for this product.”

Simon Maidment Commonwealth Bank of Australia

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Making sense of solvency The European residential mortgage-backed securities (RMBS) market appears to be under threat from a regulatory approach that gives favourable treatment to covered bonds over securitised product. Australia’s approach is a work in progress.

Verlander Much work is being done in Europe around solvency II. Ben McCarthy, what are Fitch Ratings (Fitch)’s views on the product mix in an environment that appears to favour covered bonds?

McCarthy Regulation is a significant issue for structured finance and is certainly having a significant impact on the issuance and investment allocations between securitisation and covered bonds around the world. Like Basel III in the bank sector, solvency II is designed to protect insurance companies from failure by attributing different capital weights to different products. Given Fitch estimates the insurance sector to be 20 per cent of the European investor base for new issues, any negative impact it has will have flow on effects on Australian markets.

A Fitch report on solvency II highlights the significant differences

in capital weights under solvency II pertaining to holders of securisation or covered bond investments for firms using the standardised approach.

For the same rating and duration, a securitisation transaction under solvency II can attract more than 10 times the capital of a covered bond or corporate exposure.

The relevance in Australia is both that Australian issuers are issuing into European markets but also that the local insurance regulator will be looking at such regulatory developments and may set up similar provisions in Australia.

There is a lot of talk in Europe around the view that the incentives are now based on the idea that structured finance is a bad thing and covered bonds are good – even when the underlying collateral can be identical.

As a credit rating agency our view is solely on credit risk and we are able to achieve the same ratings conclusion on both asset classes.

methodologies. A 400-450 basis point spread, subordinated RMBS tranche is getting to a level where it’s somewhere similar to taking the equity risk premium on the first-loss piece to a bank – despite the fact that it also has lenders’ mortgage insurance (LMI) on the pool.

At the prime, triple-A level RMBS is still competing in a high spread environment. We have very wide levels on senior debt from financials, with US and European banks – national champions – at 200-300 basis points over bills in the front part of the yield curve. For me to attract money I have to offer

Verlander Could solvency II effectively kill the RMBS market in the UK? As an insurer you would, perversely, be better off buying loans in whole-loan format than buying rated RMBS. McCarthy All things remaining equal,

it’s true that solvency II could have a significant impact on asset allocation – but it won’t necessarily kill RMBS. First, insurance companies which will be governed by solvency II are only a portion, albeit a large one, of the investor universe. Secondly, it may force other outcomes such as a push for insurers to improve internal systems to get off the standardised approach, because once they are able to use their own data they have the ability to align the capital weights between securitisation and other products.

One of the challenges more broadly is that structured finance has earned a stigma over the last four years or more

an end yield to my clients that can persuade them to switch out of term deposits. To the extent that term deposits are effectively senior debt offering a 5.5 per cent coupon, if I am trying to create a reason to move into an actively-managed bond fund, another asset at 100-130 basis points over swap isn’t compelling. ◆ Maidment But there is still a huge amount of cash that doesn’t appear to be getting recycled – issuers are calling deals, so investments are getting repaid. I’m sure analysis would reveal that the net outflows from this sector, given

“RMBS is interesting if I can sell it at the level at which I bought it. It doesn’t make a lot of sense if I buy something when I know the bid is immediately going to be 20 basis points back.”

Jeff Brunton AMP Capital

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and that has taken time to resolve. We see the market working through that now and, on the positive side, we have seen a gradual increase in the volume of questions asked of Fitch in Australia.

This has to be a positive for Australian RMBS as if covered bond investors become familiar and comfortable with Australian mortgage markets it may lead them back to RMBS over time. plater Ben McCarthy makes an

interesting comment on the relative value of covered bonds versus RMBS. The 20 per cent overcollateralisation number is, as a far as I understand it, something of a mirage. In fact, it’s more like 5 per cent, and all of that comprises uninsured mortgages. As I understand it, as a bank is downgraded the requirement for collateral is reduced, which entails real overcollateralisation of more like 5 per cent.

McCarthy Covered bonds and RMBS

are very different products and have different credit profiles. A covered bond is much more like a corporate bond in that its composition evolves over time as conditions change with changing assets, issuance and overcollateralisation levels. There are provisions in covered bond legislation and legal documentation to protect covered bond investors, and the level of overcollateralisation, as a bank gets downgraded, but this will differ between programmes. Investors need to get comfortable with the possible evolution of the credit quality of a covered bond just as they do with corporate or bank evolving credit quality.

Brunton What you see in places in the

world where there’s a lot of distress, like in Spain, is that the asset classes

can merge back together quite quickly.

I still believe that if there were just a few shocks in house prices or in delinquencies, covered bonds would be more resilient than RMBS.

Mineeff Regarding the pass-through nature of RMBS in a Basel-compliant world, how does the assetliability match profile issuers get from RMBS weigh on their decision about what to issue? casey It has certainly smoothed out

our refinancing profile. I wouldn’t say matching is the major consideration but it definitely helps a lot that management and the board, as well as the local regulator, feel that RMBS allows for a better match. We want to have as many tools as we can and that is one of the advantages of RMBS.

“There is a lot of talk in Europe around the view that the incentives are now based on the idea that structured finance is a bad thing and covered bonds are good. From our point of view credit risk is the most important factor.”

Ben McCarthy Fitch Ratings

the modest amount of issuance there has been, must be enormous. We have lost a large swathe of offshore investors after the impact of the financial crisis on global demand for asset-backed securities (ABS), but even in terms of the domestic market it is difficult to see why there isn’t more demand for this product. ◆ Brunton I’m sure some of it is to do with the underweight of bonds in self-managed super funds, which are now the biggest sector of our superannuation industry. We thought pension trustee allocations had low weights at 25 per cent fixed income, but self-managed superannuation is more like 4 per cent. The way rate cuts are going to perhaps rebalance the ability of fixed income managers to offer attractive yields relative to term deposits could allow flow back in.

What we have been saying for the last year or two is that covered bonds were a stepping stone to find a way to fund the households of Australia – not only their current level of debt but also for growth. What we come back to is how the industry should be thinking about how to make RMBS more homogeneous with covered bonds. I think covered

bonds have provided some inkling into demand – attracting a bigger buyer base by removing credit risk from the table to some extent.

Mineeff Is it possible that the homogeneity Jeff Brunton refers to could be assisted by the ability to issue RMBS out of master trusts, giving investors a more bullet-type security that is clearly a lot easier in terms of the discussions around pre-payment? ◆ Plater We are reasonably comfortable with the current state of structures. Having said that, it would be interesting to see what would happen in Australia, as master trusts address a number of issues with static pools – though they also introduce their own complexities. ◆ Hanna The potential to provide some homogeneity through using a master trust is beneficial. That said, when such large coupons are on offer extension risk is not a major concern.

And I’m doubtful whether the homogeneity offered by master trusts would remove all liquidity issues.

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“There seem to be investors who continue to have good appetite for RMBS and to differentiate the product from covered bonds. Obviously the risks are different. but when the yield is higher than they could get on covered bonds they are happy to take the trade-off.”

Peter Casey ING Bank Australia

The key is increasing secondary market liquidity and the ability to offer liquidity – which is challenging in this industry when brokers have reduced balance sheet availability. I expect that the availability of master trusts in Australia would not have a material effect on liquidity.

RELATIVE VALUE AND LIQUIDITY Verlander Jeff Brunton, from your perspective when does RMBS become a compelling buy?

It’s interesting if I can sell it at the level at which I bought it. It doesn’t make a lot of sense if I buy something when I know the bid is immediately going to be 20 basis points back. It is ridiculous to have relativities that I have to move paper – even small amounts – at 160 basis points over bills when the primary is coming in at 140 basis points over.

We have to remember there are a number of mandates that went into this asset class. When the market started dislocating in 2008, some of our clients asked how they could access the wide spreads, so the consultants said to buy RMBS. That meant entry points were about 175-250 basis points over swap. What we are hearing from those channels is that they are disappointed they can’t get out, and that payout has been slower – so what do they do now? ◆ Maidment Were those secondary market purchases from the re-import of securities? ◆ Brunton Yes. But what it means is that clients are now seeing the RMBS asset class as one that requires an illiquidity premium. I think, longer term, the market will be fine and RMBS will trade inside senior unsecured and somewhere close to covered, as it should. But to get there we need more liquidity in the secondary market. ◆ Brunton

Davison Could a degree of additional tightening hide a multitude of sins in that regard? If the market got to a point where there was more ability for RMBS pools to offer spread, there could be potential to offer that illiquidity premium while the secondary market improves. ◆ Brunton That

could be a path. If covered bonds keep coming in – to 90 basis points over bills or similar – and RMBS is out there looking attractive, and the secondary starts to pick up again, we might start to get some trades. ◆ Maidment Creating more end-user demand for the product is key. At the end of the day, dealers only put prices on the securities they think they can reasonably recycle into the market. The fact that you can’t get a bid on RMBS is a function of trading desks feeling they can’t move that paper to someone else within a reasonable time within the bid-offer spread. ◆ Hendry It is more intensive for intermediaries to make sure they know where the pay-downs are. It’s like looking down a line of train cars: you have to look at the covered bond and look at the senior unsecured, and one can either trust that information or go somewhere else for it. ◆ Mineeff We can work around that in some ways, but there are still deficiencies in that the buyer and seller are likely to have a different view on pre-payment risk. It comes back to the issue of pre-pay ability. ◆ Plater I agree with that. The 100 per cent senior unsecured market has proven to be probably the most liquid bond asset class outside government and semi-government bonds in Australia. I have no doubt that it will continue to be more liquid, while RMBS will never be as liquid as either the senior unsecured or sovereign markets. If liquidity is the core requirement, RMBS is never going to meet it because it’s not

“It seems possible that the homogeneity of RMBS and covered bonds could be assisted by the ability to issue RMBS out of master trusts, giving investors a more bullet-type security that is clearly a lot easier in terms of the discussions around pre-payment.”

Justin Mineeff Commonwealth Bank of Australia

40 · Australian Securitisation Journal | Issue 02_2012

OFFSHORE DYNAMICS Australian banks have sold substantial volumes of covered bonds in offshore markets since regulation allowing them to issue the product was passed in October 2011. Issuers point out that the long-established covered bond market in Europe means there is a deep pool of investors who understand the product. For this demand to move to residential mortgage-backed securities (RMBS), however, structures may need to change.

Verlander Simon Maidment, was the ability to do such successful trades as Commonweath Bank of Australia’s covered bonds reflective of the fact that Europe is a larger, more developed market that maintained liquidity around yield curves, whereas with RMBS there is much less of all those factors?

Maidment In Europe covered bonds are clearly much better understood and better followed than RMBS. Banks in Europe don’t get liquidity credit for buying Australian bankissued covered bonds, so we don’t see large participation from bank investors in our euro issuance. What we get is a real-money, institutional investor and pension buyer base that could be considered the same kind of buyer base we would be targeting with double-A minus, senior unsecured issuance.

That is not really a buyer base that has historically participated in Australian RMBS as a relatively short-dated passthrough security structure doesn’t suit their underlying fund liabilities. The missing link is being able to do longerdated, bullet-type bonds to meet the needs of this investor group. Master trust structures are part of the solution.

There is strong interest in Australian mortgage collateral from offshore investors. They understand that collateral because Australian banks have issued senior unsecured forever and a day, and the bottom line is that 60 per cent of our balance sheets are mortgages. We have also issued RMBS in foreign currencies in the past, so people have understood the quality of Australian RMBS credit product.

The real issue is how we can give global investors RMBS in a format that suits their investment needs. Foreign currency and bullet-payment bonds out of master trusts would potentially open up a wider investor universe.

However, at the moment it is totally uneconomic for us to issue foreigncurrency RMBS despite the fact that qualitatively there is a lot of demand.

The world is short of issuers of highquality paper at the moment. Investors would like exposure to the asset class, it’s just that the cost of funds is uneconomic.

Davison Is that just a product of the basis swap?

Maidment It is a combination of factors. First, there continues to be compelling triple-A RMBS issuance from the likes of UK and Dutch banks that is priced at much wider spreads than makes sense for Aussie RMBS given the relative strength of the collateral and services. Secondly, the basis and pre-payable cross-currency swaps are very expensive. Again, master trust structures would provide some potential relief here by reducing cross-currency pre-payment risks and costs.

Verlander Have any new jurisdictions of demand interest emerged ouside Australia?

Maidment I think there is a lot of qualitative interest. It boils down to the kinds of levels that make sense for Australian issuers and the pricing of competing product for offshore investors. Unfortunately, there is still a substantial gap between the two. UK master trusts are doing deals at Libor

plus 160 basis points with 30 per cent credit in hand; an Australian RMBS transaction at the same levels just wouldn’t stack up economically for us.

But investors are interested in Australian collateral and they understand its performance. The question in my mind as this opportunity develops is whether investors are willing to differentially price for different collateral and servicer quality, even though we are talking about triple-A RMBS offerings.

Tuttle We are looking wider, to the US market for example. We have spent a lot of time on non-deal roadshows explaining our acquisition of the predominantly prime GE mortgage portfolio in late 2011. We would like to be able to bring a prime RMBS deal, market conditions willing, in the second half of 2012.

We have term funding facilities in place for the GE mortgage portfolio so we don’t have to come to the market with any degree of urgency. But frankly we think it’s important that we create a prime RMBS issuing shelf backed by collateral managed and serviced by Pepper Australia.

To achieve a sizeable deal we have to secure a sizeable bid, and that means we think we may have to do some of the triple-A notes in the US. The feedback we have had to date is encouraging.

I think we have to be careful of creating short-dated money market tranches that satisfy current US investor appetites but then create Australian dollar-denominated tranches that don’t necessarily satisfy domestic investor requirements. The other thing we need to be mindful of is the fact that we may still require government support to get a prime RMBS deal done.

41

roundtable

“I actually think RMBS has the potential to be as liquid an asset class as senior unsecured, but at the moment it is a long way from that and it may never get back there. right now it’s as if you need an appointment to sell RMBS.” David Hanna Macquarie Funds Management

directly fungible between two different deals; each one has to be underwritten. ◆ Hanna I actually think RMBS has the potential to be as liquid an asset class as senior unsecured, but at the moment it is a long way from that and it may never get back there. It’s possible, but secondary market liquidity must be provided.

Right now it’s as if you need an appointment to sell RMBS. ◆ Casey When it comes to liquidity, we already spoke about ADIs being fairly aggressive buyers of RMBS and I think we must consider the fact that ADIs have liquidity through RMBS’s repo eligibility, whereas others reach liquidity only through selling – it’s just a different dynamic. ◆ Hendry In general, bank investors are buy-and-hold participants: the paper gets caught up so there is no liquidity on the other side. Bank investor buying just morphs into a black hole – it doesn’t develop the market. We might have to go to a market-clearing price level for RMBS to get enough investors involved to start that velocity going through. But the spreads that are available to flow through to RMBS margins might not work. ◆ Casey It remains a reasonably illiquid asset base that suits some buyers more than others. ◆ Maidment The introduction process of Basel III in Australia has certainly had an impact on activity in the RMBS and bank bond markets. Most recently, late in 2011 the planned Reserve Bank of Australia committed liquid facility was amended to include internal RMBS as part of meeting the liquidity coverage ratio. This has reduced the need for banks to securitise mortgages and externalise RMBS to meet additional liquidity requirements.

ADIs will still need components of different liquidity in their portfolios, but we don’t yet know what proportion of each the regulator will require. Once that information is finalised, it may spur some change in the level of activity from ADI investors.

However, that will depend on how much of liquid assets books is held in pure level-one securities, how much of the securities that are held in the committed liquid facility will be made up of internal RMBS, and what additional assets – including RMBS – will make up the rest of the portfolio.

Davison Will increased bank book holdings of RMBS help secondary liquidity? The banks are 42 · Australian Securitisation Journal | Issue 02_2012

the largest investor sector already but their participation is not stopping illiquidity. ◆ Maidment Having an active ADI investor base enhances the depth of the market and therefore potential liquidity. That said, in the back half of last year the RMBS deals getting done were largely driven by ADI investors rather than real money.

That is not adding to bank system funding. At some point the banking sector actually has to go and sell bonds to realmoney investors, offshore investors or someone else outside its own sector. There is only a certain degree to which these transactions can be ADI to ADI – that is an important point to get across. ◆ Hendry Perhaps fund managers also have to market their funds differently to end investors. It is possible that the fixed income asset class needs to have closed-end funds where managers can tell investors on day one what their returns are – they know the margin will be there along with some form of substitution. ◆ Brunton We don’t use RMBS for liquidity. Within our core credit models – with funds specifically trying to target a broad set of industries – we have been holding 10-13 per cent in RMBS over the last few years. And we took that up from 5-6 per cent due to spreads jumping wider. Our cash books hold approximately 20-30 per cent in floating rate notes, and maybe 10 per cent of the cash portfolios are RMBS. I wouldn’t really take RMBS holdings much above that in the diversified credit fund.

We have some offshore clients who are inclined to be fixed-rate buyers and as a result don’t like pass-throughs, so some product feature changes could develop a bigger buyer base among our clients. But there are still a lot of industries and issuers that are trading wider than RMBS; financials look attractive to us again given some of the actions Europe has accomplished through the long-term refinancing operation facilities. And there are still a lot of longer-dated infrastructure-like assets in Australia that are funded at 150250 basis points over bills.

Verlander One might think that there would be – and maybe there already is – movement from equities to fixed income in asset allocation. But it is not apparent to me that that has actually happened. Is there any activity on that front?

GOVERNMENT SUPPORT The Australian Office of Financial Management (AOFM) has provided strong support for the domestic residential mortgage-backed securities (RMBS) market since first receiving the mandate to buy these securities in 2008. In total the government debt management agency’s allocation pool for the asset class amounts to A$20 billion (US$19.9 billion).

Hendry Is the AOFM making the RMBS market more transparent or is it complicating the situation?

Hanna Continued AOFM presence is

necessary to maintain the market and stimulate competition, though it has gone on for a lot longer than even the AOFM probably expected.

The key issue is what its role will be going forward. Demand for primary deals could increase if the AOFM became involved in the secondary market rather than limiting support to primary deals. It’s getting to that tricky stage where it appears a lot of the efforts over the last two years have not had a significant impact on pricing or demand for the overall asset class.

Tuttle I think the AOFM presence is still needed. It is filling pockets in the capital structure that the market still hasn’t fully stepped into. The AOFM is still there not because the issuers

necessarily want it there but they need its support in specific tranches of the capital structure. The AOFM is still serving a useful purpose, as much as I’d love to get a deal done without it.

I don’t ascribe to the view that the AOFM participation is damaging the market. It is important to keep nonbank prime issuance happening, which I think has been positive. Clearly we’d like to see the government able to step away, but the AOFM’s support is still needed.

Maidment I think there were some

concerns around relative pricing when the AOFM was the sole buyer, and this is still one of the challenges at the moment: everyone wants 2.5- to three-year pass-through RMBS, but someone needs to buy the longer tranches with extension risk.

Our solution in Medallion 2011-1 was to offer a five-year soft bullet tranche and that attracted a different type of portfolio buyer. But in most of

It is being discussed, but I think reality says you’re right: it’s not flowing through yet even though the tide is turning. ◆ Maidment I think the sensible debate that is happening around the superannuation industry as a whole is not about the accumulation phase but about the retirement phase. If you look at the cash-flow profile of an RMBS deal it looks quite nice in terms of an amortising profile that a portfolio can be built around to pay a longer-term retirement income stream. ◆ Hendry

the non-major bank RMBS deals, we saw that the AOFM was the buyer of choice for the longer-dated passthrough tranches.

McCarthy When we rate RMBS we

do cash-flow modelling to make sure transactions are solvent, and a lot of the time if the AOFM was not participating at a non-market price there would be no deal.

Maidment It’s true that there is a limit

in terms of where spreads can go in RMBS. Due to the RMBS structure, at some point as spreads widen we will not be able to do a transaction as there won’t be sufficient yield in the pool.

Clearly this isn’t the case for senior and covered bonds. It almost provides a natural supply limit at a point when spreads are widening, which I would have thought was attractive, ‘right way around’ risk for investors in this asset class.

This will happen over the course of time, but are we all going to wait around for 20 years when that pool of retirees becomes substantially larger? ◆ Plater We have certainly seen some superannuation funds expressing an increased level of interest in secured assets, of which mortgage-backed lending is one. So perhaps the debate we are talking about has sliced through to the consciousness of more stable retirement streams within the overall superannuation portfolio construction. ■

“In general, bank investors are buy-and-hold participants: the paper gets caught up so there is no liquidity on the other side. We might have to go to a market-clearing price level for RMBS to get enough investors involved to start velocity going through.”

Peter Hendry Commonwealth Bank of Australia

43

feature

The slow burn

he most common descriptor for the Australian securitisation market as April gave way to May is as prosaic as it is accurate: slow. At A$2.63 billion (US$2.62 billion) equivalent over just three transactions in the year to May 7, it is the slowest start for securitisation since the ground zero year of 2008, when under A$1 billion equivalent was issued by early May. Towards the end of the first quarter of 2012, with no deals seemingly on the horizon since First Mac’s A$300 million FirstMac Mortgage Funding Trust Series 2-2011 in December

2011, the Australian Office of Financial Management (AOFM) played its role in trying to establish a price point for residential mortgage-backed security (RMBS) transactions, selling A$50 million of four-year RMBS in March at 132 basis points over the five-year swap rate. “This adjustment to the AOFM’s holdings was undertaken as part of its portfolio management activity and to provide transparent pricing guidance to the market,” noted the agency.

Only a major price contraction of covered bond primary margins between January and the end of the first quarter – and the sense that most of the tightening that would occur had happened – helped drag RMBS into economically sensible territory for Australian issuers.

Commonwealth Bank of Australia’s five-year, domestic debut covered bond priced at 175 basis points over swap in January, while ANZ Banking Group (ANZ) priced its inaugural AUD covered bond in March at 95 basis points over swap. That contraction brought the relative value proposition for RMBS swimming just into range.

“North of 150 basis points issuance is uneconomical for any part of the capital structure,” comments Robert Camilleri, managing partner at Realm Investment House (Realm) in Melbourne. “Even at May’s levels RMBS issuance is only just sustainable.”

Secondary market activity across both covered bonds and RMBS remains quite subdued, with investors reporting virtually no selling in covered bonds and only a few trades in RMBS. “In terms of what this says about RMBS markets, it’s actually quite encouraging,” comments John Sorrell, head of credit at Tyndall Investments (Tyndall) in Sydney. “In the days of the global financial crisis we were deluged with stock. This time around there is paper available but the flow is much slower and levels are not blowing out so profoundly relative to primary levels.” Sorrell estimates secondary levels at around 10-20 basis points wider than primary, compared with the 100-150 point blow outs that characterised the financial crisis period. “This is symptomatic of a healthier market,” he adds.

an n u a l a b s v o l u m e s f r o m a u s t r a l i a n issuers

covered bond issuance by aus t ralian banks

A slow start for the securitisation market in 2012 has been complemented by the unleashing of a torrent of covered bonds from Australia’s major banks. As the market adjusts to the changed dynamics created by a new asset class, investors are pondering their options. Given the quality of Australian collateral remains exceptional their key issues are pricing, liquidity and structure.

By Kimberley Gaskin

70

14,000

60

12,000

50

25 25.9

40 30 20

0.97 40

10 0

volume (US$m equiv.)

volume (A$BN equiv.)

T

2006

31.9

2 8.4

10

2007

2008

2009

0

Foreign currency volume (AUD equiv.)

SOU R C E : K A N G A N E W S M AY 7 2 012

44 · Australian Securitisation Journal | Issue 02_2012

2.9

22

24.6

0.9 1.7

2010

2011

2012 YTD

11,832

10,000 7,570

8,000

6,765

6,000 4,000

2,829

2,000 0

cba

AUD volume S O U R C E : K A N G A N E W S M AY 7 2 0 1 2

westpac

ANZ

NAB

While the RMBS market has failed to ignite, there are some encouraging sparks. Even if the overall volume is quite low, the types and structures of deals are a balm of sorts until there is less sporadic deal flow. ING Bank Australia (ING)’s A$744 million IDOL Trust Series 2012-1 priced at the end of March, was a fairly vanilla, price-establishing transaction for local investors.

The deal was structured conservatively to appeal to local investors, with a particularly appealing level of subordination tempting buyers. The transaction carried 3.2 years weighted average credit support below the senior tranche – beginning at 7 per cent on day one and building to 18 per cent before a pro rata amortisation between the senior and subordinated tranches. In Australian RMBS deals it is more typical to double the subordination over time.

ME Bank’s A$1 billion SMHL Securitisation Fund 2012-1, which priced in April, was a cat of a different colour, with a US$420 million, one-year bullet maturity tranche aimed at US money market investors. This tranche was supported by a redemption facility provided by National Australia Bank (NAB), under which NAB guarantees to underwrite any potential shortfall in the tranche’s redemption fund at maturity date.

The year’s third offering was different again: on May 4 Pepper Homeloans (Pepper) priced the first non-conforming transaction of the year in a A$300 million deal.

Comments Stephen Maher, head of debt markets research at Macquarie Bank in Sydney: “The diverse deals we have seen this year indicate the market is returning to some balance after a very challenging period. We are starting to evaluate or create fair-value benchmarks between secured on-balance sheet structures like covered bonds and secured off-balance sheet structures like RMBS and unsecured securities.”

Given the success of the ME Bank deal, market participants anticipate more targeted, very tailored structures will emerge as Australian issuers seek new offshore investors. Adds Maher: “We will see issuers running the structuring spectrum, from vanilla through to complex structures, and doing so in order to serve the broadest possible investor group. However, issuance still needs to be executed efficiently.”

It is one thing to provide a structure that works for a specific set of investors. But institutions providing a cash flow hedge – as in the case of the ME Bank transaction – are taking risk themselves and there are limits to the extent to which they can do this.

“Banks will be focused on identifying what suits investors and seeing if that is cost efficient,” adds Maher.

Stephen Maher Macquarie Bank

issuance comparison: abs and covered bonds by aus tralian iss uers 12,000 volume (US$m equiv.)

Signs of life

0 10,902

10,000

0 11,089

8,000 6,000 4,000 2,000 0

299 1,329 1,636 2,050 0 2,250 2,182 998 523 Oct 11 nov 11 dec 11 JAN 12 FEB 12 mar 12 Apr 12 may 12 td 4,390

1,868

ABS

Covered bonds

S O U R C E : K A N G A N E W S M AY 7 2 0 1 2

Market participants are circumspect about volume. “My expectation is for sluggish to middling flow this year. Supply of non-bank RMBS will be largely determined by the participation of bank investors, however. They have been active buyers of covered bonds and bank RMBS, but there are no other big buyers to purchase non-bank RMBS,” says Sorrell.

International context is playing a role in this tepid flow.

January and February were peak times of stress in European funding markets, effectively kyboshing international investor appetite and sending local real-money investors into their shells.

Comments Camilleri: “Internationally there has been strong focus on the long-term refinancing operation [LTRO] and investors have focused on LTRO or repo-eligible securities only.

Closer to home the complete rearrangement of the structured finance market by the introduction of covered bonds affected real-money investor appetite for RMBS.”

covered bonds But clearly the main contributor to the sluggish beginning for securitisation has been the advent of a shiny new triple-A rated asset class – covered bonds. By May 7, A$10.1 billion in covered bond issuance had hit the domestic market over the course of 2012, with another deal from at least one non-major bank anticipated to follow. According to KangaNews data, to May 7 2012 total covered bond issuance since the market for Australian issuers opened in October 2011 has been US$28.996 billion equivalent; over that same period of time US$10.5 billion equivalent has been issued by Australian securitisation

“We will see issuers running the structuring spectrum, from vanilla through to complex structures, and doing so in order to serve the broadest possible investor group. Banks will be focused on identifying what suits investors and seeing if that is cost efficient.”

45

feature

Australia shows its quality As delinquency levels in other developed markets – most notably the US – stay at historically high levels, Australian collateral performance remains exceptional. While there are some headwinds for the local economy which may affect the mortgage market, investors do not anticipate any major effect on residential mortgage-backed securities (RMBS).

While the lower levels of securitised transactions in the Australian market mimic supply trends offshore, there is a profound difference between the reasons why there is such a difference in supply. In markets like the US the level of delinquencies on underlying mortgages have been so high they have profoundly compromised RMBS, leading to very negative sentiment on the asset class on the part of investors.

The Australian collateral performance experience sits firmly at the other end of the spectrum. According to Moody’s Investors Service (Moody’s) the most recently available data – up to February 2012 – demonstrates that arrears levels are still extremely low in Australia compared with international peers. Delinquencies on 90-day plus mortgages were at 0.64 per cent at the end of February, a slight increase on levels from 2011 and 2010 (see chart on this page).

Australian residential mortgage arrears 2.0 1.8

The numbers support what Australian borrowers have been telling offshore investors since the onset of the global financial crisis: the Australian market is different. Tighter lending standards, a different tax regime and a different philosophy towards debt have kept lending within sensible boundaries (see p16-17).

Moody’s does not anticipate that delinquencies in Australia will rise over 2012. “The low interest rate environment and moderate economic growth will offset unemployment and underemployment in certain sectors of the economy such as retail and tourism,” comments Arthur Karabatsos, senior analyst at Moody’s in Sydney.

1.6 delinquencies (% of CB)

While the situation in the US continues to improve it is still markedly worse than the Australian experience. Fannie Mae’s “serious delinquency rate” – single-family home loans at least three months past due or near foreclosure – was at 3.67 per cent for Q1 2012, down from 5.47 per cent a year earlier.

Australia has even outperformed the UK market, which has itself remained reasonably resilient. In November 2011 – the most recently available data from Moody’s – UK prime RMBS 90-day plus delinquencies were at 1.89 per cent.

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0 2001

2002

2003

2004

2005 90+

2006

2007

2008

60-90

2009

2010

2011

30-60

S ource : Moody’ s Inv estors S er vi ce M ay 2012

Moody’s Analytics expects Australian GDP to grow to 3.4 per cent in 2012 from 2.8 per cent in 2011. Meanwhile, the all-important unemployment figure

60/90-day delinquencies: International comparison (%) Date

Australia (60-day)

Australia (90-day)

UK (90-day)

Ireland (60-day)

Jan/Feb 12

0.34 0.31 0.24 0.30

0.64 0.60 0.49 0.64

N/A 1.91 1.91 1.82

11.98 6.6 3.34 1.59

Jan/Feb 11 Jan/Feb 10 Jan/Feb 09

S ource : Moody ’s Inv es tors S er vi ce M ay 2012

issuers. The markets appear to be reflecting one another clearly: high issuance in one product has tended to coincide with low levels of issuance in another (see chart on p45).

While ING’s IDOL transaction was supported by some real-money investors, according to the bank’s Sydney-based treasurer, Michael Witts, the question resounding through 46 · Australian Securitisation Journal | Issue 02_2012

the Australian seciuritisation market this year has been where domestic fund managers are.

Paul Garvey, general manager, funding and financial markets at ME Bank in Melbourne, says he is surprised at the absence of domestic real-money investors. The issuer specifically tailored a US dollar tranche for money market

“The key point is that for trend growth of around 3.25 per cent to be achieved, interest rates need to be lowered significantly and benign inflation provides plenty of scope to do so.”

is not widely expected to change drastically. Most commentators predict a 2012 average of between 5.1 and 5.7 per cent, while the April figure was a positive surprise at 4.9 per cent.

There is no doubt some of the macroeconomic data from Australia look soft, however.

According to data from AMP Capital, retail sales growth has been weak, up only 2 per cent in the year to March. In addition, housing-related activity is sluggish, with housing prices down around 6 per cent from 2010 highs.

But, as AMP Capital’s Sydneybased economist, Shane Oliver, says: “None of this is to say the economy is collapsing. Rather, the key point is that for trend growth of around 3.25 per cent to be achieved, interest rates need to be lowered significantly and benign inflation provides plenty of scope to do so.” The Reserve Bank of Australia (RBA) has taken the initiative, cutting rates by 50 basis points in May. The two key areas of concern for international investors in Australian RMBS tend to be fear of sharp house price declines and the impact of a slowdown in China.

Housing price decline There has certainly been a decline in Australian house prices. Over the 12 months ending March 2012, house prices fell across all major cities. Brisbane recorded

Shane Oliver AMP Capital

the largest decline of 6.14 per cent, followed by Adelaide with 5.66 per cent. House prices in Sydney fell by 3.15 per cent. On a weighted average basis, house prices in the capital cities reduced by 4.39 per cent over the same period according to Moody’s.

However, the broad expectation is still for a long plateau rather than a gut-churning drop. In the RBA’s May statement on monetary policy, following the 50 basis point cash rate cut, governor Glenn Stevens expressed some concern but also stated the reserve bank’s view that some stability has emerged.

“Housing prices have shown some signs of stabilising recently, after having declined for most of 2011, but generally the housing market remains subdued,” he said.

The China syndrome As for the impact of a weaker China, there has yet to be any flow through on to Australian RMBS. A mighty confluence of events would be required to trigger any real reaction, according to Vera Chaplin, primary credit analyst at Standard and Poor’s (S&P) in Melbourne.

“The credit quality of most Australian RMBS is likely to remain stable, despite renewed uncertainty over the

investors so as to diversify investor demand. “There is large pricing divergence between a triple-A rated covered bond and a triple-A rated securitisation bond, which should appeal to domestic real-money investors,” he comments.

Garvey says the bank sold the subordinated notes of its 2012 transaction to self-managed super funds and high net worth

global economic outlook and growth prospects for China,“ she says. “While S&P expects the performance of the housing market and housing loans to weaken, the credit enhancement available to Australian senior RMBS is likely to withstand a worsening of portfolio credit quality.”

Chaplin’s view is based on S&P’s assessment of the quality of the RMBS loan portfolio. “With the weighted average loan-to-value ratio at 62 per cent and weighted average seasoning at about 60 months, underlying portfolios are well-positioned to withstand any deterioration in economic conditions.”

Australian households have also responded quite actively to declining economic conditions, creating another layer of protection for RMBS. “Households are actively managing their financial positions and increasing their savings by taking advantage of changes in monetary policy. Property prices in Australia are declining gradually, and lenders’ mortgage insurance providers as well as lenders have tightened their underwriting standards,” notes Chaplin. “These preparations have put Australian households, and especially the RMBS sector, in a good position to handle a slowdown in China.”

individuals while most of the senior real money investment came from the US. “There is certainly a market there, but Australian institutional investors are currently not part of it,” notes Garvey.

It is not that fund managers do not want RMBS. In fact, some buyers express a preference for the RMBS structure, given 47

feature

Withdrawing support Securitisation market participants long for an independently robust market, but government support is still a clear necessity.

“The AOFM programme was set up to encourage competition to lending and it is fulfilling that task. Without its support it becomes more difficult for regional issuers to fund effectively through securitisation markets.”

Paul Garvey ME Bank

48 · Australian Securitisation Journal | Issue 02_2012

executive director, markets group, Jim Murphy, talked in more detail about encouraging a transition towards a sustainable and innovative securitisation market that is not reliant on government support, at the Australian Securitisation Forum (ASF)’s annual conference.

“Not only does the RMBS market continue to show signs of resilience, but both the assetbacked security and commercial mortgage-backed security markets seem to showing signs of life as well,” said Murphy. He added: “This is of course partly due to the very high-quality product that is being sold. Australian mortgages continue to record very low delinquencies, underpinned by the strong Australian macro economy. In the longer term, I am confident the securitisation market will remain an important part of our financial landscape.”

AOFM buying programme november 2008 t o may 2012 7,000 6,000 volume (A$m)

When the Australian Office of Financial Management (AOFM) announced its intention to purchase residential mortgage-backed securities (RMBS) to support competition in Australia’s mortgage market in September 2008, few imagined that government support would remain as necessary as it clearly still is nearly four years later.

The original A$8 billion (US$7.98 billion) purchasing programme was extended in 2009 by another A$8 billion, and in April 2011 the federal Treasurer issued a direction for the AOFM to invest up to an additional A$4 billion in Australian RMBS. By the end of the first week in May 2012, the AOFM had invested A$14.9 billion in 45 RMBS deals, allowing 19 lenders to raise over A$30 billion in funding.

The AOFM has been weaning the market off its high level of support, with its buying falling from A$5.75 billion in 2009 to A$2.1 billion in 2011 (see chart on this page). In 2012 to May 7 the AOFM had bought A$323.5 million across two transactions – ING Bank (Australia)’s A$744 million IDOL Trust Series 2012-1 and ME Bank’s A$1 billion SMHL Securitisation Fund 2012-1.

In its April 2012 update to the market, the government debt management agency reiterated the temporary nature of the programme and in November 2011 the Department of Treasury’s

On a philosophical level, issuers long to be independent of the government support. Notes Tim Hughes, treasurer of Suncorp Bank and chairman of the ASF: “We understand that the programme is reducing significantly in terms of how much the AOFM has to invest and we are equally keen to see the market stand on its own two feet.”

But there is clear acknowledgment that now is too soon for that support to be ripped away. “The industry will need to come together to facilitate a transition from the AOFM regime,” notes Hughes.

Paul Garvey, general manager, funding and financial markets at ME Bank, believes that AOFM support remains important. He says: “The programme was set up to encourage competition to lending and it is fulfilling that task at the moment. The AOFM coinvests with other investors and without their support it becomes more difficult for regional issuers to fund effectively through securitisation markets.”

By implication, the remaining A$5.1 billion currently committed by the government could support over A$10 billion of issuance. However, issuers are not convinced that primary market flow will really pick up in the absence of domestic real-money participation.

“Domestic fund managers just aren’t buying, and although bank balance sheets and offshore realmoney accounts are, we’d like to see Australian fund managers participating,” says Garvey.

5,000 4,000 3,000

5,750

2,000 1,000 0

4,780 2,070

1,900 2008

2009

SOURCE: A ust ral ian office of f inanc ia l managemen t may 2 0 1 2

2010

2011

323 2012

the covered bond product is still in its infancy in Australia.

Institutional investors bought covered bonds in droves in response to the far wider-than-anticipated pricing on the early deals, which presented an opportunity too good to pass up.

However, Sorrell believes RMBS have a cleaner structure than the covered bond product. “I would not want to test the claim on a covered bond because the complexities are immense,” he comments. “RMBS are clear cut: the cash flows are determined by when the mortgages pay back, unlike a covered bond – which has a fixed final maturity that requires disposal of mortgages that may have a long time to repayment. In the case of a covered bond you have the whole of the bank’s balance sheet to consider.”

Realm’s Camilleri is also remaining circumspect on covered bonds, in spite of liking the value in the early deals. “Covered bonds have the benefit of overcollateralisation and the balance sheet guarantee, but banks are not immune to corporate downgrade. People don’t realise the very real nature of the risk that banks are downgraded to a level where the triple-A rating on the covered bond comes under pressure,” he comments. In many respects Camilleri is happier with RMBS, which carry no balance sheet risks. “I think the outcomes in the event of default or downgrade scenarios are clearer with RMBS.” Likewise, Jeff Brunton, head of credit markets at AMP Capital in Sydney, argues that RMBS have been a bedrock of stable income. Although he was delighted with the margin on the early covered bonds, Brunton still likes securitisation. “Prepayment rates are starting to slow down, but new generation pools with very good credit enhancement make a really good contribution to a diversified credit fund,” he comments. That said, Brunton acknowledges that AMP Capital is not buying much right now.

relative value and liquidity For domestic fund managers relative value and liquidity remain key issues, even though the levels on covered bonds have crunched in so significantly and in spite of their concerns about the covered structure. Investors say the pricing for the difference in liquidity between the covered and securitised products is still not wide enough given the relative illiquidity of RMBS. Says Sorrell: “Covered bond pricing is certainly more rational, which has meant an opportunity has opened for RMBS issuance. However, generally issuers are still wanting tighter margins on their RMBS than we are willing to pay. At 140 basis points over swap it’s only just bearable for issuers, but it’s only just bearable for investors at that level given the illiquidity of RMBS.” John Sorrell Tyndall Investments

Brunton also feels the gap between issuer and investor expectations is still too wide when it comes to RMBS. “Covered bonds and senior unsecured have demonstrated some real liquidity but RMBS has been notably illiquid,” he says.

Liquidity for the whole market is strongly influenced by the Australian Prudential Regulation Authority (APRA) and the ability for banks to make a market and hold stock on their balance sheets without punitive capital restrictions. With clarity on the liquid assets regime also still pending, investors remain cautious on the liquidity of RMBS and are adamant about the price they want for that illiquidity. “We have had some dialogue about the price at which we would buy, but it’s still not at a level that makes sense for us,” notes Brunton.

RMBS is well and truly a buy-and-hold asset, and investors do not see much changing any time soon. “In Australia, liquidity for the whole market is a challenge because of the lack of ability for price makers to be able to borrow stock and make a price. This is because RMBS have traditionally been buyand-hold assets and will remain that way until the liquid assets regulation is clarified,” explains Camilleri.

master trust structures One option to boost liquidity is the introduction of a master trust structure to take out the pre-payment risk and offer a bullet structure to fixed income investors. The Australian Securitisation Forum (ASF) is working on recommendations to redraft APS120 to include master trusts. ASF chairman, Tim Hughes, believes this will also facilitate the international investor base. “European buyers in particular are more comfortable with master trusts,” he comments (see Q&A on p10).

Some domestic investors see merit in the master trust structure for the non-bank issuers. Camilleri argues that for a bank issuer there is no real concern around redemption or refinancing, as these borrowers have other diverse sources of funding. Consequently, a master trust will only facilitate a bullet issuance capability given they require a revolving pool.

“However, when considering the redemption and call features of the non-bank issuers, it definitely is a question of concern, primarily because they have smaller balance sheets, and are almost always reliant on a banking partner to call deals back into a warehouse,” says Camilleri. “Their business model is not as flexible due to the narrowly-focused funding strategy.” He believes a master trust will work for these players but it will be centred around the cost, as they need a liquidity provider – a bank.

I prefer clean, simple structures. Master trusts and restructuring into bullet form creates structural complexity and less clarity on the pool assets which are more subject to change. It is not clear to me that the bullet structures will be much more liquid.”

49

feature

“Covered bonds and senior unsecured have demonstrated some real liquidity but RMBS has been notably illiquid. We have had some dialogue about the price at which we would buy, but it’s still not at a level that makes sense for us.”

Jeff Brunton AMP Capital

Sorrell is not convinced a change in structure will alter liquidity. “I prefer clean, simple structures. Master trusts and restructuring into bullet form creates structural complexity and less clarity on the pool assets which are more subject to change,” he comments. “It is not clear to me that the bullet structures will be much more liquid – especially since the bullet will most likely still be a soft one unless further structural complications are added.”

Waiting for the CLF While real-money investors have been notably absent from securitisation deals, bank liquids portfolio managers have been supporting the market, outstripping domestic fund manager appetite for both securitised and covered bond product by a considerable margin. Bank investors do not share some of the reservations of fund managers about covered bond structures.

“Covered bonds are a great asset, with terrific yield and a strong rating. We find them so much easier to manage compared with RMBS because they act like a normal bond – you don’t have principal repayments to manage like you do on mortgages and there’s no pre-payment risk,” says Colin Roden, managing director, group treasury at Westpac Banking Corporation (Westpac) in Sydney.

The only downside as far as Roden is concerned is the constraint on supply caused by the regulated cap on issuance and the expectation that going forward most of the covered bond issuance from the majors will occur offshore.

Certainly bank investors see covered bonds and RMBS as complementary rather than competitive, in spite of the yield differential. Given bank balance sheets are not expected to be a profit centre, their motivations for buying are vastly different from the drivers for fund managers, which accounts

“While we are aware of what qualifies and what the fees and haircuts are for the CLF, we don’t yet know how much we actually have to hold in liquids, how much CLF we can use, what our limits on level two assets are, and what mix of assets we can have in the CLF.” Colin Roden Westpac Banking Corporation

50 · Australian Securitisation Journal | Issue 02_2012

neatly for the difference in sentiment around the pricing for liquidity risk.

Comments a second bank investor: “While most fund managers will look at relative value between covered bonds and RMBS, we usually buy both because we need the diversity. Covered bonds are generally five-year instruments while pass-through RMBS typically offer a three-year weighted average life, so we are happy to carry both.”

Regulatory pause Bank investors have been active buyers of covered bonds since the asset class was introduced in Australia, and have been longterm participants in the domestic RMBS market. While both asset classes continue to be part of banks’ buying plans, they say their appetite has been affected to some degree by pending liquid assets clarification.

APRA has indicated that internal securitisation, along with government bonds, domestic bonds issued by supranationals and other foreign governments, and debt and asset-backed securities issued by authorised deposit-taking institutions (ADIs), will be included in the pre-arranged committed liquidity facility (CLF) vehicles that banks can use to make up the shortfall on their liquidity coverage ratios (see Q&A on p31).

There is no indication that either APRA or the Reserve Bank of Australia (RBA) have a desire to reduce the use of internal RMBS within CLFs. As a result, bank investors say the CLF regime – particularly the inclusion of self-securitisation – has slightly dampened their appetite for other assets classes. “We anticipate more internal RMBS going forward,” notes one bank buyer.

The inclusion of internal RMBS as an acceptable asset in CLFs takes some of the pressure off ADIs’ requirement to realign their liquid assets pools, especially as the RBA does not indicate any explicit cap on the proportion of the facility that can be made up of this type of paper (see Q&A on p32).

Internal RMBS remains a significant component of ADIs’ liquid assets books. For example, in their most recent halfyear results, ANZ and Westpac reported that they held A$28.6 billion and A$35 billion, respectively, in internal securitisations in their liquid assets books. ANZ’s liquid assets book totalled A$99 billion, while Westpac’s totalled A$101 billion.

But until each bank finalises their CLF with APRA, liquid portfolio managers say they do not expect to conduct a substantial rebalancing of the portfolio mix. As Westpac’s Roden explains: “While we are aware of what qualifies and what the fees and haircuts are, we don’t yet know how much we actually have to hold in liquids, how much CLF we can use, what our limits on level two assets are, and what mix of assets we can have in the CLF.” ■

Covered bond

issuer profiles

australia & new zealand banking group Issuer

Australia and New Zealand Banking Group

Issuer rating (S&P/Moody’s/Fitch)

AA-/Aa2/AA-

Reporting period Total domestic assets (A$bn)

October – September 360 (31 Mar 2012)

C ove r e d b o n d p r o g ramme Issuing entity

ANZ Residential Covered Bond Trust

Covered bond rating (Moody’s/Fitch)

Aaa/AAA

Programme type

Legislative

Programme size

US$20bn

Covered bond guarantor

Perpetual Corporate Trust

Security trustee

P.T.

Bond trustee

db Trustees (hong Kong)

Servicer

Australia and New Zealand Banking Group

Trust manager

ANZ Capel Court

Asset monitor

KPMG

Statutory overcollateralisation minimum (%)

3.00

Contractual overcollateralisation minimum (%)

5.25

contractual Overcollateralisation at reporting date (%) total overcollateralisation at reporting date (%)

20.92 (24 Apr 2012) 21.13 (24 Apr 2012)

P ool dat a

BREAKDOWN OF ISSUANCE BY CURRENCY (us$m equiv.)

Portfolio cut-off date

2 Apr 2012

Current aggregate principal balance (A$)

7,926,913,370

No. of loans (unconsolidated)

28,346

No. of loans (consolidated)

28,346

Ave. loan size (consolidated) (A$)

279,648

334 USD

761

Maximum loan balance (consolidated) (A$)

1,972,274

Weighted ave. consolidated current LVR (%) Weighted ave. consolidated current indexed LVR (%) Weighted ave. interest rate (%)

64.16

6.57

Weighted ave. seasoning (months)

14.65

1,250

EUR

64.25 3,146 SOURCE: ANZ ma y 11 2012

337.33 22.63

30+ day arrears (%)

0.17 27.72 / 34.78 / 1.94 / 14.44 / 5.72 / 14.80 / 0.61

Issua n c e s ummar y t o da t e (may 1 1 ) 6,432

AN Z’ S COVERED BOND ISSUA NCE HISTORY 3,500

3,146

3,000 volume (us$m equiv.)

Weighted ave. remaining term (months)

Total outstanding in benchmark format (US$m equiv.)

Total outstanding in private placement format (US$m equiv.)

Total outstanding in fixed rate format (US$m equiv.)

Total outstanding in FRN format (US$m equiv.)

1,274

AUD

Investment loans (%)

Mortgage pool by geographic distribution: NSW&ACT / VIC / TAS / QLD / SA / WA / NT (%)

NOK CHF

2,369

2,500 2,000 1,500

1,250

1,000 500

334 4,248 2,517

o

0 NOV 11

DEC 11

JAN 12

FEB 12

0

0

MAR 12

APR 12

SOURCE: ANZ ma y 11 2012

51

Covered bond

issuer profiles

AN Z ’ s COVERED B ONDS ISSUED TO D ATE ISIN Code

Series

Settlement date

Maturity date

Currency

Volume (M)

FX rate on pricing

US05252EAA10 (Rule 144A) US05252FAA84 (Reg S)

2011-1

23 Nov 11

23 Nov 16

USD

1,250

1.0000

USD Coupon Volume type (M)

Coupon (%)

Listing

1,250

Fixed

2.400

Not listed London

XS0730566329

2012-1

24 Jan 12

24 Jan 22

NOK

2,000

5.9970

334

Fixed

5.000

XS0731129234

2012-2

18 Jan 12

18 Jul 22

EUR

1,000

0.7847

1,274

Fixed

3.625

London

CH0143838032

2012-3

13 Feb 12

13 Feb 19

CHF

325

0.9520

341

Fixed

1.500

SIX Swiss Exchange

CH0142821468

2012-4

13 Feb 12

13 Feb 15

CHF

400

0.9526

420

FRN

65/3m CHF Libor

SIX Swiss Exchange

AUAU3CB0191872

2012-5

23 Mar 12

23 Mar 16

AUD

1,000

0.9444

1,049

Fixed

5.250

Not listed

AU3FN0015046

2012-6

23 Mar 12

23 Mar 16

AUD

2,000

0.9536

2,097

FRN

95/3m BBSW

Not listed

SOURCE: A N Z may 1 1 2 0 1 2

◆ for further information please contact: www.anz.com

John Needham, Head of Structured Funding, Group Treasury / +61 3 8654 5373 / john.needham@anz.com Rod Ellwood, Structured Funding, Group Treasury / +61 3 8654 5146 / rod.ellwood@anz.com

commonwealth bank of australia Issuer

Commonwealth Bank of Australia (CBA)

Issuer rating (S&P/Moody’s/Fitch)

AA-/Aa2/AA-

Reporting period Total domestic assets (A$bn)

July – June 550 (Jan 2012)

C o v e r e d b o n d p r o g r amme

Pool d ata

Issuing entity

CBA

Portfolio cut-off date

30 Apr 2012

Covered bond rating (Moody’s/Fitch)

Aaa/AAA

Current aggregate principal balance (A$)

20,693,452,125

Programme type

Legislative

No. of loans (unconsolidated)

83,968

Programme size

US$30bn Perpetual Corporate Trust P.T. Deutsche Trustee Company CBA securitisation advisory services

Ave. loan size (A$)

246,030

Maximum loan balance (A$)

1,642,000

Covered bond guarantor Security trustee Bond trustee Servicer Trust manager (wholly-owned subsidiary of CBA) Cover pool monitor

PricewaterhouseCoopers

Statutory overcollateralisation minimum (%)

3.00

Contractual overcollateralisation minimum (%)

5.25

contractual Overcollateralisation at reporting date (%)

22.20 (30 apr 2012)

total overcollateralisation at reporting date (%)

81.96 (30 apr 2012)

52 · Australian Securitisation Journal | Issue 01_2012

Weighted ave. consolidated current LVR (%) 61.04 Weighted ave. consolidated current indexed LVR (%)

57.84

Weighted ave. interest rate (%)

6.79

Weighted ave. seasoning (months)

34

Weighted ave. remaining term (months)

316

Investment loans (% by loan balance)

30.29

30+ day arrears (%)

0.29

Mortgage pool by geographic distribution: 38.95 / 36.08 / 2.51 / NSW&ACT / Vic / TAS / SA / WA / NT (%) 7.67 / 13.67 / 1.12

Issua n c e s ummar y t o da t e (may 1 1 ) Total outstanding in benchmark format (US$m equiv.)

9,684

Total outstanding in private placement format (US$m equiv.)

2,056

Total outstanding in fixed rate format (US$m equiv.)

Total outstanding in FRN format (US$m equiv.)

9,591 2,149

COMMONWE ALTH BANK OF AUSTR AL IA’S COVERED BOND I SSUANCE HISTORY

BRE A KDOWN O F ISSU A NCE

BY CURRENCY ( US$ M E Q U IV . )

7,000 USD

2,050

volume (us$m equiv.)

eur

4,352

AUD

3,638

NOK

6,227

6,000 5,000 4,000 3,000

689

1,000

CHF

GBP

0

932

79

2,182

2,050

2,000

1,373 0 DEC 11

0 JAN 12

FEB 12

MAR 12

APR 12

May 12

SOURCE: COMM ONWE ALTH BANK OF AUSTR AL IA ma y 11 2012

SOURCE: COM MONWE A LTH B A NK OF AUSTR ALIA ma y 11 2012

CO MM ONWEA LTH B A NK O F AUSTR A LI A ’ S COVERED BONDS ISSUED TO DATE ISIN Code

Series

Settlement Maturity date date

Currency

Volume FX rate on USD (M) pricing Volume (M)

Coupon type

Coupon (%)

Listing

XS0729014281

1

12 Jan 12

12 Jan 17

EUR

1,500

0.7733

1,940

Fixed

2.625

London

XS0733058969

2

27 Jan 12

27 Jan 22

NOK

1,875

6.0696

309

Fixed

5.000

London

XS0733058969

2

27 Jan 12

27 Jan 22

NOK

500

5.9974

83

Fixed

5.000

London

XS0733058969

2

27 Jan 12

27 Jan 22

NOK

1,000

5.8681

170

Fixed

5.000

London

AU3CB0188951

3

25 Jan 12

25 Jan 17

AUD

2,000

0.9621

2,079

Fixed

5.750

Unlisted

AU3FN0014866

4

25 Jan 12

25 Jan 17

AUD

1,500

0.9621

1,559

FRN

0.9/BBSW

Unlisted

XS0737866060

5

1 Feb 12

1 Feb 27

EUR

109

0.7672

142

Fixed

3.815

London

50

FRN

135/US Libor

Unlisted

3.930 138/GBP Libor 3.990

London London SIX Swiss Exchange

US20271AAA51

6

2 Mar 12

2 Mar 17

USD

50

1.0000

XS0739982980

7

25 Jan 12

2 Feb 27

EUR

67

0.7707

86

Fixed

XS0744839415

8

13 Feb 12

13 Feb 17

GBP

50

0.6337

79

FRN

XS0745915826

9

6 Feb 12

13 Feb 30

EUR

117

0.7616

154

Fixed

London

CH0180071612

10

15 Feb 12

13 Mar 15

CHF

425

0.9223

461

FRN

60/CHF Libor

CH0180071613

11

15 Feb 12

13 Sep 19

CHF

350

0.9223

379

Fixed

1.500

SIX Swiss Exchange

XS0751446872 US20271AAB35 (Rule 144A) US20271BAB18 (Reg S)

12

23 Feb 12

1 Mar 27

EUR

50

0.7513

67

Fixed

3.700

Unlisted

13

16 Mar 12

16 Mar 17

USD

2,000

1.0000

2,000

Fixed

2.250

ASX

CH0183597266

14

5 May 12

5 May 22

CHF

100

0.9184

92

Fixed

1.625

SIX Swiss Exchange

XS0775914277 XS0778752047

15 16

3 May 12 9 May 2012

3 May 22 9 May 2022

EUR NOK

1,500 750

0.7638 0.1685

1,964 126

Fixed Fixed

3.000 4.550

London London

SOURCE: COM MONWE A LTH B A NK OF AUSTR ALIA ma y 11 2012

◆ for further information please contact: www.cba.com.au

Simon Maidment, Head of Group Funding and Execution / +61 2 9118 1339 / simon.maidment@cba.com.au Edward Freilikh, Executive Manager, Group Funding / +61 2 9118 1337 / edward.freilikh@cba.com.au / 53

Covered bond

issuer profiles

National australia bank Issuer

National Australia Bank

Issuer rating (S&P/Moody’s/Fitch)

AA-/Aa2/AA-

Reporting period Total domestic assets (A$bn)

October – September 457 (Nov 2011)

C o v e r e d b o n d p r o g ramm e Issuing entity

National Australia Bank

Covered bond rating (Moody’s/Fitch)

Aaa/AAA

Programme type

Legislative

Programme size

US$20bn

Covered bond guarantor

Perpetual Corporate Trust

Security trustee

P.T.

Bond trustee

Deutsche Trustee Company

Servicer

National Australia Bank

Trust manager

nab Covered Bond Trust

Cover pool monitor

Ernst & Young

Statutory overcollateralisation minimum (%)

3.00

Contractual overcollateralisation minimum (%)

5.25

contractual Overcollateralisation at reporting date (%) total overcollateralisation at reporting date (%)

21.50 (31 mar 2012) 38.40 (31 mar 2012)

P o o l dat a Portfolio cut-off date

26 Mar 2012

Current aggregate principal balance (A$)

4,530,855,224.84

No. of loans (unconsolidated)

17,329

No. of loans (consolidated)

17,329

Ave. loan size (consolidated) (A$)

261,460.86

Maximum loan balance (consolidated) (A$)

1,360,000.00

Weighted ave. consolidated current LVR (%)

60.39

Weighted ave. consolidated current indexed LVR (%)

52.19

Weighted ave. interest rate (%)

6.65

NOK

24.75 326.50

Investment loans (%)

13.77

30+ day arrears (%)

0.06 41.69 / 37.39 / 5.79 / 11.89 / 2.50 / 0.73

SOURCE: NATI ONAL AUSTRAL IA BANK may 11 2012

N ATIONAL AUSTR AL IA BANK’ S COVERED BOND ISSUANCE HISTORY 2,500 volume (us$m equiv.)

Is s ua n c e s umma r y t o da t e (may 1 1 )

54 · Australian Securitisation Journal | Issue 01_2012

774 1,532

Weighted ave. remaining term (months)

Total outstanding in benchmark format (US$M equiv.)

Total outstanding in private placement format (US$m equiv.)

Total outstanding in fixed rate format (US$BN equiv.)

Total outstanding in FRN format (US$M equiv.)

523

GBP

eur

Weighted ave. seasoning (months)

Mortgage pool by geographic distribution: NSW&ACT / Vic / SA / WA / TAS / NT (%)

BREAKDOWN OF I SSUANCE

BY CURRENCY (US$M EQUIV .)

2,053 776 2,055 774

2,306

2,000 1,500 1,000 500

523

0 DEC 11

JAN 12

SOURCE: NATI ONAL AUSTRAL IA BANK ma y 11 2012

0

0

0

FEB 12

MAR 12

APR 12

NAT IONA L A USTRA L I A B ANK ’ S COVERED BONDS I SSUED TO DATE ISIN Code

Series

Settlement date

Maturity date

Currency

Volume (M)

FX rate on pricing

USD Volume (M)

Coupon type

Coupon (%)

Listing

XS0721652252 XS0721652252

Series-1

20 Dec 11

20 Dec 21

NOK

2,000

5.9694

335

Fixed

5.000

Luxembourg

Series-1

23 Dec 11

20 Dec 21

NOK

500

5.9442

84

Fixed

5.000

Luxembourg

XS0721652252

Series-1

30 Dec 11

20 Dec 21

NOK

625

6.0318

104

Fixed

5.000

Luxembourg

XS0730559894

Series-2

13 Jan 12

13 Jan 17

EUR

1,000

0.7821

1,279

Fixed

2.625

Luxembourg

XS0733140460

Series-3

20 Jan 12

20 Jan 27

EUR

200

0.7883

254

Fixed

4.080

Luxembourg

XS0737096874

Series-4

27 Jan 12

27 Jan 15

GBP

500

0.6459

774

FRN

145/Libor

Luxembourg

SOURCE: NA T I ON A L A USTR A L I A B ANK may 11 2012

◆ for further information please contact: www.nab.com.au

Eva Zileli, Senior Manager, Secured Funding / +61 3 8634 8219 / eva.zileli@nab.com.au Darren Bell, Manager, Secured Funding / +61 3 8634 2213 / darren.m.bell@nab.com.au /

westpac banking corporation Issuer

Westpac Banking Corporation

Issuer rating (S&P/Moody’s/Fitch)

AA-/Aa2/AA-

Reporting period Total domestic assets (A$bn)

October – September 582.4 (31 Mar 2012)

C ove r e d b o n d p r o g ramm e Issuing entity

Westpac Banking Corporation

Covered bond rating (Moody’s/Fitch)

Aaa/AAA

Programme type

Legislative

Programme size

US$20bn

Covered bond guarantor

BNY Trust Company of Australia

Security trustee

BTA Institutional Services Australia

Bond trustee

BNY Mellon Corporate Trustee Services

Servicer

Westpac Banking Corporation

Trust manager

Westpac Securitisation Management

Cover pool monitor

PricewaterhouseCoopers

Statutory overcollateralisation minimum (%)

3.00

Contractual overcollateralisation minimum (%)

5.25

Contractual Overcollateralisation at reporting date (%) total overcollateralisation at reporting date (%)

22.55 (31 mar 2012) 31.50 (31 mar 2012)

55

Covered bond

issuer profiles

P o o l d ata

Issuance su mma ry to date ( may 11)

Portfolio cut-off date

31 mar 2012

Current aggregate principal balance (A$)

9,106,705,020.92

No. of loans (unconsolidated)

36,290

No. of loans (consolidated)

31,016

Ave. loan size (consolidated) (A$)

250,943

Maximum loan balance (consolidated) (A$)

1,980,571

Weighted ave. consolidated current LVR (%)

62.35

Weighted ave. consolidated current indexed LVR (%)

60.89

Weighted ave. interest rate (%)

6.77

Weighted ave. seasoning (months)

39

Weighted ave. remaining term (months)

313

Investment loans (%)

16.67

30+ day arrears (%)

0.46 46.69 / 31.11 / 0.09 / 5.65 / 13.54 /1.66 / 1.26

Mortgage pool by geographic distribution: NSW&ACT / Vic / Qld / SA / WA / TAS / NT (%)

Total outstanding in benchmark format (US$m equiv.)

Total outstanding in private placement format (US$m equiv.)

Total outstanding in fixed rate format (US$m equiv.)

Total outstanding in FRN format (US$m equiv.)

BRE A KDOWN O F ISSU A NCE B Y CURRENCY (US $ M E Q U I V. )

7,108 464 5,571 2,001

WESTP AC BANKI NG CORPOR ATION ’S COVERED BOND ISSUANCE HISTORY 7,000

NOK

464

volume (us$m equiv.)

USD

1,000

EUR

AUD

2,327

3,780

6,572

6,000 5,000 4,000 3,000 2,000 1,000

1,000 0

0

DEC 11

jan 12

0 NOV 11 SOURCE: WESTPA C B A NKI NG CORPORAT ION ma y 11 2012

feb 12

0

0

maR 12

APR 12

SOURCE: WESTP AC BANKI NG CORPORATI ON ma y 11 2012

WESTPA C B ANK ING CORPOR A T ION ’ S COVERED BONDS I SSUED TO DATE ISIN Code

Series

Settlement date

Maturity date

Currency

Volume (M)

FX rate on pricing

USD Volume (M)

2011-C1

28 Nov 11

28 Nov 16

USD

1,000

1.000

1,000

Coupon Coupon type (%)

Listing

Rule 144A US96122WAA80; Reg S US96122XAA63 XS0735613373

2012-C1

8 Feb 12

8 Feb 22

NOK

1,800

6.0485

298

Fixed

5.000

London

XS0735794819

2012-C2

8 Feb 12

8 Feb 22

NOK

1,000

6.0293

166

Fixed

5.000

London

AU3CB0189322

2012-C3

6 Feb 12

6 Feb 17

AUD

1,700

0.9553

1,780

Fixed

Unlisted

AU3FN0014874

2012-C4

6 Feb 12

6 Feb 17

AUD

1,400

0.9553

1,466

FRN

5.750 165/

XS0747205101

2012-C5

15 Feb 12

16 Feb 16

EUR

1,750

0.7521

2,327

Fixed

London

AU3FN0014874

2012-C4

24 Feb 12

6 Feb 17

AUD

500

0.9350

535

FRN

2.125 165/

Fixed

2.450

BBSW

BBSW

London

Unlisted

Unlisted

SOURCE: WESTPA C B A NKI NG CORPORAT ION ma y 11 2012

◆ for further information please contact: www.westpac.com.au

Guy Volpicella, Head of Structured Funding and Capital, Group Treasury / +61 2 8254 9261 / gvolpicella@westpac.com.au John Georgiades, Director, Structured Funding and Capital, Group Treasury / +61 2 8253 1053 / johngeorgiades@westpac.com.au

56 · Australian Securitisation Journal | Issue 01_2012

ASF 2012 Professional Development Course dates June

June

June

July

14-15

15

25

23-24

ASF Diploma of Securitisation Brisbane

Securitisation Fundamentals Brisbane

Applied Core Module Sydney

ASF Diploma of Securitisation Melbourne

July

July

August

August

25

30

1

13

Securitisation Fundamentals Melbourne

Applied Workshop: Advanced Accounting & Tax Issues Sydney

Australian Covered Bonds Melbourne

Applied Workshop: Contemporary Legal & Regulatory Developments Sydney

August

August

August

August

13

14-15

20

22

Securitisation Fundamentals Sydney

ASF Diploma of Securitisation Sydney

Applied Workshop: Trustee Role, Responsibilities & Relationships Sydney

Australian Covered Bonds Sydney

September

October

26

22-23

Applied Workshop: Principles of Credit Analysis Sydney

Detailed course information and registration is available on our website:

www.securitisation.com.au

Annual Conference Sydney

Thank you

Pepper Australia Group would like to thank our investors and key advisors on the successful completion of Pepper Residential Securities Trust No.9 (“PRS9”).

Pepper Residential Securities Trust No.9 (“PRS9”) A$300,000,000 Non-Conforming Residential Mortgage-Backed Securities Issue - May 2012 A$72,000,000

Class A1 Notes

AAA(sf)/AAAsf

A$138,000,000

Class A2 Notes

AAA(sf)/AAAsf

A$38,400,000 A$13,500,000 A$12,600,000 A$9,600,000

Class A3 Notes Class B Notes Class C Notes Class D Notes

AAA(sf)/AAAsf AA(sf)/NRsf A(sf)/NRsf BBB(sf)/NRsf

A$6,000,000

Class E Notes

BB(sf)/NRsf

A$2,400,000 A$7,500,000

Class F Notes Class G Notes

B(sf)/NRsf Not Rated

Arranger and Joint Lead Manager

Joint Lead Manager

Legal Advisor to Pepper

Trustee