Commercial property group Mirvac has become the third issuer to approach the Australian commercial mortgage-backed market so far this year, with a deal that brings the total value of CMBS transactions announced since January to A$604 million.

Volume to date appears to put the market on track to achieve Standard & Poor's forecast of more than A$2 billion of issuance by the end of the year. The trend is regarded as encouraging, given concern in the commercial property industry about the difficulty of obtaining terrorism insurance since last year's Sept. 11 attack on the United States.

The industry, which expects that 60% of institutionally held property will be inadequately insured by the middle of the year, has called on the Federal Government to help avert a potential crisis. CMBS issuers appear to have weathered these concerns well, so far. As ING Office Fund demonstrated with its A$408 million transaction in February - the first CMBS in Australia not covered by terrorism insurance - it is still possible to secure a triple-A rating (in ING's case, from S&P) and sell widely, if the underlying portfolio is sufficiently diversified.

Mirvac has so far only announced its intention to issue, and details of the transaction remain sketchy. The A$190 million, four-year deal will be an extension of a five-year, A$500 million offer completed last year, however, and will be lead-managed jointly by ANZ Investment Bank and Deutsche Bank. S&P has assigned a preliminary AA' rating to A$90 million of the deal, and A' to the remaining A$100 million.

Subordinated debt is becoming an increasingly significant component of Australian CMBS deals, reflecting a relative shortage of high-yielding securities in the domestic market (another factor that may be offsetting investor concern about the lack of terrorism insurance).

Last month, for example, Macquarie Goodman Industrial Trust priced A$76 million of Class B CMBS, with A$40 million priced at 62 basis points over the three-month bank bill swap rate and the balance at 89 basis points over the November 2006 Commonwealth Government bond. Westpac Insitutional Bank was arranger and lead manager. The Mirvac deal is expected to price by April 30.

NMHL prices

Home loan securitizer NMHL priced its fifth domestic deal, worth A$300 million. NMHL Securitisation Fund No. 5 consisted of A$294.75 million of Class A floating-rate notes priced at BBSW plus 34 basis points, with a weighted average life of 3.64 years, and A$5.25 million of floating-rate Class B bonds with a weighted average life of 6.87 years.

Pricing for the subordinate tranche was not disclosed. The Class A bond was expected to be rated AAA' and Aaa' by Standard & Poor's and Moody's Investors Service, respectively, while the Class B bonds were expected to be rated AA' and Aa2'. Credit Suisse First Boston was arranger and lead manager with Macquarie Bank and National Australia Bank as co-managers.

Rembrandt unveiled

One of the domestic corporate bond markets' arcane but lucrative sidelines - debt repackaging - looks set to become more investor-friendly.

ABN AMRO has entered the debt repackaging market in Australia with a program, called Rembrandt, which it believes sets a new standard in cost-effectiveness and ease of use.

The program, unlike other repack vehicles in the Australian market, uses only one set of documentation, and the ease with which repackaged securities can be unwound gives investors more liquidity than they would probably get from competing structures, according to the investment bank.

The move appears to be well timed, as it coincides with concern among investors about the lack of asset diversification, thin supply volumes and patchy liquidity in the local market. ABN AMRO claims that its new structure will make life easier and cheaper for fixed-income fund managers, for whom the technique is becoming an important investment tool.

And where one investment bank claims to have broken new ground, others will surely follow. Repackaging gives investors additional flexibility in tailoring their portfolios to meet particular requirements by, for example, exchanging one currency denomination, interest-rate structure or cashflow characteristic for another. It can also increase their investment universe.

A fund manager restricted to buying bonds denominated in Australian dollars, for example, can gain vicarious exposure to the U.S. dollar market by buying $U.S. bonds that have been repackaged as $A notes. According to Moody's Investors Service, the repackaging market worldwide has grown strongly, from about U.S. $5 billion in 1994 to U.S $28 billion two years ago (these figures exclude private placements, and are thought to understate significantly the true size of the industry).

"Outside Australia, it's going gangbusters," said Paul Cordeiro, ABN AMRO's Sydney-based director of structured credit products. "Twenty-eight billion U.S. dollars is a big whack of money."

A number of special-purpose vehicles exist in Australia, but investors typically commit only a small proportion of their portfolios to them. Many are structurally complex, incur significant costs each time a transaction is made and, according to Cordeiro, are relatively illiquid when investors want to unwind their transactions.

Cordeiro and Lucio Febo, ABN AMRO's head of distribution, are promoting the investment bank's repackaging vehicle, called Rembrandt, as a simpler proposition. As with similar vehicles, investors can transfer bonds or other financial assets to Rembrandt, which holds them as security against which it issues new notes (physical transfer is optional, as the original owners of the assets retain beneficial interest in them). These new notes are tailored to investor requirements.

The main difference between Rembrandt and other vehicles is in the structure. In a traditional SPV, for example, each note issued needs its own documentation, giving rise to legal costs of between $50,000 and $100,000 every time a deal takes place. Rembrandt, however, uses only one set of documentation. The low-cost structure enables quite small or short-dated deals to be transacted economically.

Although the repackaging process uses derivatives to create the desired interest rate or currency structure, agreements with the swap counterparty ensure that the purchaser of the Rembrandt note has no exposure to the counterparty's credit. There is no difference in the credit rating between the underlying financial asset and the issued note.

This simplicity is helpful for liquidity. An investor who no longer needs to hold the Rembrandt note can either sell it to a third party or back to ABN AMRO. More importantly, the swap component can then simply be unwound and the remaining asset sold back into the market. "The structure of other SPVs contain a lot of costs that make them hard for an investor to get out of," Febo said. He added that the only potential buyers of such structured securities were usually the underwriters who had originated them in the first place, not all of whom were always willing to deal.

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