Offshore investors look set to buy record volumes of Australian mortgage-backed securities this year, having already absorbed the equivalent of A$7 billion worth since January, or 75.8% of the record A$9.23 billion sold offshore during the whole of calendar 2000.
The rush to buy follows an intensive "buy Australian" marketing campaign in the U.S. sponsored by the Australian Securitization Forum, an umbrella group representing Australian securitizers and intermediaries. Favorable cross currency basis swap rates are helping, too.
As a result, Australian entities are achieving their biggest deals and best pricing levels to date. Commonwealth Bank of Australia became the latest issuer to set new benchmarks for the sector, when it priced a transaction this month worth nearly A$3 billion in what qualified as the biggest Australian MBS deal to date, both in overall terms and in terms of the tranche sold to U.S. and European investors.
The global component of the deal represented the third offshore transaction by the bank's Medallion Trust program, and consisted of $1.1 billion (A$2.19 billion) of Class A1 notes priced at 18.5 basis points over three month U.S.$ Libor. The bank did not disclose the weighted average life of the tranche, although the legal maturity for the transaction as a whole was December 18, 2031.
According to one market participant who did not wish to be named, the half basis point in the pricing was significant, in that it suggested that the paper had been well bid. Previous global Australian MBS transactions had been priced in whole basis points, the issuer usually having given away a basis point during negotiations, said the source.
The Series 2001-1G deal also included two domestic senior Class A2 tranches, consisting of A$330 million (Tranche 1) with an average life of 1.3 years, priced at 24 basis points over the one-month bank bill rate; and A$255 million (Tranche 2) with an average life of 5.2 years, priced at 35 basis points over the benchmark.
Pricing was not disclosed for the A$39 million subordinated tranche.
An interesting structural aspect of the deal was the fact that the mortgage pool was the first in an Australian MBS transaction to contain assets originated by separate legal entities - CBA and Colonial Ltd, a banking to financial services group acquired by CBA last June. Colonial had previously securitized home loans through its CATS program.
The pool composition had presented a number of legal issues - such as the allocation of risk between the two institutions with regard to warranties they had given when sellling their respective assets into the pool - which were accommodated in the documentation.
The deal followed a $1.059 billion transaction for National Australia Bank through its HomeSide vehicle in January (at the time, the biggest and most tightly-priced Australian global MBS issue), and a $938 million deal for another bank, St. George, through its Crusade program. Next to issue offshore will be non-bank financier Interstar Securities, which last week launched its second transaction - a $465 million deal through its Interstar Millennium Series 2001-1E Trust.
The deal - lead managed jointly by Barclays Capital and Macquarie Bank, repeating their roles in the company's first offshore MBS last year - included a $220 million Class A-2 one-year tranche targeted at money market investors, similar to that which featured in the Crusade deal. Other offshore tranches - all of which were documented under Rule 144A regulations - consisted of $125 million with a three-year bullet maturity and $120 million with a five-year bullet maturity. A domestic subordinated tranche was also planned, equivalent to $35 million.
Fitch said it expected to rate the senior notes F1+, AAA and AAA respectively, and the subordinated notes, AA-. The ratings partly reflected the high level of subordination - 7% - which is a feature of Interstar transactions in both domestic and offshore markets.
The lead managers declined to discuss price talk. In its first offshore deal last June, however, Interstar sold $465 million of Class A2 senior notes with a weighted average life of 4.4 years at 28 basis points over three-month Libor, and privately placed A$60 million of of subordinated paper with a five-year WAL at 70 basis points over the three-month swap rate. Salomon Smith Barney was lead manager on the CBA Medallion A-1 notes with CBA, CSFB, Deutsche Bank and J.P. Morgan as co-managers. CBA was lead manager on the domestic tranches, with Warburg Dillon Read Australian and Macquarie Bank as co-managers.
In the domestic market, SG Australia priced a deal on behalf of Heritage Building Society, the main part of which consisted of A$236.4 million of Class A notes, at 37 basis points over the one month bank bill swap rate. The HBS Trust 200101 transaction included A$9 million of subordinated paper, pricinig for which was not disclosed.
The senior tranches were rated AAA by S&P and the subordinated, AA-.