Australian securitizers have poured around A$8.5 billion (U.S.$4.39 billion) into the domestic and global markets since the beginning of the year, adding significantly to the diversity of assets as they did so.

A number of trends held firm, not least the tendency towards bigger deals in the domestic market as Australian Mortgage Securities, a subsidiary of ABN AMRO, testified. The financier's A$1.3 billion ARMS II Fund XI, announced and yet to price as this issue went to press, was its biggest yet and fell only slightly short of the A$1.45 billion domestic record set by RAMS Mortgage Corp. in November.

Also as this issue closed, Westpac Banking Corp. signalled its intention to return to the global mortgage-backed securities market for the first time since 1999. Moody's Investors Service disclosed a provisional Aaa rating for the $1 billion of Series 2002-1G WST Trust Class A notes. The agency will not be rating the A$25 million Series 2002-1G WST Trust Class B subordinated notes.

Earlier in the month, Commonwealth Bank of Australia priced its fourth global issue through its Medallion Trust. The 2002-1G transaction included U.S.$1 billion of A1 notes issued into the U.S. and Euro markets which, with an average life of 3.1 years, priced at 17 basis points over three-month Libor. The deal also consisted of two senior tranches of A$ notes - A$182 million of Class A2 Tranche 1 with an average life of one year, which priced at 25 basis points over the three-month Bank Bill rate; and A$325 million Class A2 Tranche 2 with an average life of 4.5 years, which priced at 34 basis points over the benchmark.

Pricing for A$40 million of Class B subordinated notes was not disclosed. CBA's head of group funding, John Te Wechel, said the pricing on the A1 notes was "lower than any Australian MBS issue achieved during 2001, indicating that the MBS market has recovered from uncertainty following Sept. 11."

Market takes on risk

In the domestic market, evidence of strong demand for structured paper was seen in the acceptance of unusual risk profiles.

ING Office Trust became the first commercial property owner to securitize assets on which there was no underlying terrorism insurance while Liberty Financial, a non-conforming home loan specialist, launched a A$1 billion commercial paper program intended to replace bank-sourced warehousing facilities. It also announced its move into the non-conforming auto loans market - the first Australian securitizer to take such a step.

Australian commercial-mortgage securitizers, like their counterparts elsewhere, have felt the effect of Sept. 11 in the carving out of terrorism coverage from property insurance, and a general increase in premiums. ING Office Fund manager, Tino Tanfara, said that terrorism cover was "virtually impossible to get and had been capped typically at between A$30 million and A$40 million." Insurance premiums had risen by between 50% and 300%, although Tanfara claimed that ING had not been affected too badly.

The key to investor acceptance of the A$408 million deal - and to Standard & Poor's award of a AAA rating - was the diversity of the portfolio, which consisted of 18 office buildings around the country with valuations ranging from A$27.5 million to A$250 million. The average lease lasts 7.1 years, while the loan-to-valuation ratio across the pool of assets was 38.9%, just below the 39% threshold required for an S&P AAA' rating.

In response to investor demand, the deal, arranged and lead-managed by Westpac Institutional Bank with JPMorgan as co-manager, was split into two. The larger tranche, A$230 million of five-year, fixed-rate, class-A notes, were priced at 68 basis points above the Commonwealth Government November 2006 bond, offering a semi-annual yield of 6.25% a year. The A$178 million of five-year, floating-rate, class-A notes offered a quarterly coupon equivalent to the three-month swap rate plus 40 basis points, and were priced at par. Tanfara said he was "pleased" with the result.

Liberty Financial's vehicle, described as a "single-seller, multi-assets, multi-geography'' conduit, was the first of its kind in Australia and, according to Liberty, possibly also the first of its kind in the world.

Liberty is one of a number of niche lenders in Australia securitizing non-conforming loans - a market reckoned to be worth on average about A$4 billion (U.S.$2.06 billion) a year. Liberty, established six years ago, has already issued three lines of medium-term notes totalling A$500 million through Citibank/Salomon Smith Barney. Lead manager on the CP program was Macquarie Bank. The program was expected to be rated A-1 by Standard & Poor's and P-1 by Moody's Investors Service.

Queensland deal prices

The Queensland Allfinanz subsidiary, Suncorp Metway, returned to the market for the first time in three years, through its Apollo Trust securitization vehicle.

The Series 2002-1 deal consisted of A$488.25 million in Class A notes with a weighted average life of 3.4 years and A$11.75 million in Class B notes with a WAL of 5.9 years. Ratings agencies, Fitch and Standard & Poor's, assigned AAA' ratings to the Class A notes and AA' ratings to the Class B notes. The Class A notes priced at 34 basis points over the one month bank bill swap rate, at the low end of the 34-36 basis points range at which they had been marketed. Pricing for the Class B notes was kept confidential.

Other residential MBS deals to have taken place so far this year include the A$500 million domestic tranche of Commonwealth Bank of Australia's global Medallion transaction, a A$317 million refinancing for Interstar Securities and deals for Heritage Building Society and Bank of Queensland worth A$261.1 million and A$340 million, respectively.

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