Timbercorp. has originated the first securitization in Australia ultimately backed by loans funding investments into forestry plantations. Asia Pacific Receivables Corporation Ltd issued A$41.42m (US21.6m) medium-term notes via arranger Commonwealth Bank of Australia (CBA). The proceeds of these will be used to acquire the loans.

"This is the first transaction of its kind in the Australian market, and the first globally from an Standard & Poor's perspective," said Manny Arabatzis, associate director at Standard and Poor's in Melbourne. "There have been transactions which have shared some similar features, but none have involved the securitization of tax-effective agricultural investment loans. The transaction is a closed pool with a full passthrough for principal payments with value being given to the cash flows of the transaction and past performance, whilst no value was given to the land or the trees. The loans are for three, four or five years, but the trees take ten to twelve years to mature."

The transaction has several unique features. The borrowers can repay the loans early with no break costs. "This risk is mitigated by the short term nature of the loans which already have a high repayment rate." explains Arabatzis. "But as there is no tax incentive to redeem loans early, this is rarely done."

Investors will be able to buy up to 25% of the equity portion, and borrowers have an upfront tax deduction for the investment. The plantation investment industry has support from the Commonwealth and state parliaments of Australia, to promote environmentally friendly industries. The Australian government also wants to reverse the trade deficit in forest products, valued at A$1.963bn, a significant contribution to the Australia's overall current account deficit.

The notes are rated by Standard & Poor's:

*Tranche 1$30.185m, ratedAAA

*Tranche 2 A$2.012m, rated AA-

*Tranche 3 not rated

The notes have a final maturity on 31 October, 2004.

Deal strengths include:

*The past performance of arrears and write-offs

*the borrower base - predominantly high-income and high net worth individuals

*25% credit support provided the class A notes (5% from the subordinated tranche and 20% from the overcollateralisation).

*20% credit support provided to the class B notes from the overcollateralization.

*excess spread embedded in the transaction through the use of the swap and the floor hedging mechanisms.

CBA will provide a hedge against interest rate mismatches on the fixed-rate receivables and floating-rate obligations of the trustee.

"This form of financing is likely to attract further attention from other industry participants," said Arabatzis. "Securitization is attractive in that once the program is up and running it is potentially more efficient to administer than traditional sources of finance."

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