The Australian market has gained new depth and diversity within the last month, hosting a rare commercial mortgage-backed transaction, two new conduits and a new link with the neighboring New Zealand market.

One of the conduits introduced a new player to the Australian sector: Bank of America. The bank's Australian branch launched the A$1.5 billion (US$883 million) Perry Antipodes Trust No. 1, as part of the group's global family of Perry structures. The program, which will issue commercial paper to fund bond purchases, had been rated A1-plus and F1-plus by Standard & Poor's and Fitch respectively and was scheduled to make its inaugural A$400 million issue as ASRI went to press.

BoA's merger partner, NationsBank, launched an Australian asset-backed vehicle, Coral Sea Pty Ltd., in 1997, funded out of the U.S. CP market.

For the local players, however, the deal of the month was the A$224 million commercial MBS by Macquarie Office Trust, one of 10 specialist office trusts listed on the Australian Stock Exchange. The trust is managed by Macquarie Bank which, through the PUMA and POLAR programs managed by its Macquarie Securitsation subsidiary, is a leader in the residential MBS and asset-backed CP sectors.

The transaction was the first in the country by a listed property trust and only the third CMBS issue, encouraging hopes that the development of the CMBS sector may finally gather momentum (the previous deals, both of which took place in November last year, were the securitization of the ground lease at the InterContinental Hotel in Sydney, and a deal backed by two shopping centers owned by the Leda property group).

As one investor commented: "This is a different kind of security and does provide some diversification. It's the beginning of a good trend and it's important that it doesn't stop here." Ironically, however, he was not tempted to buy the paper.

Macquarie Office Trust has a market capitalization of around A$625 million while its portfolio of 18 modern, investment grade buildings has been independently valued at A$798 million. All but two of the buildings were included in the transaction, which consisted of a single tranche of Class A senior notes rated AAA by S&P with a scheduled maturity date of September 15, 2003 and final maturity 18 months later.

The notes were interest-only, creating significant refinancing risk at the end of the initial term. Marketed at 34-36 basis points over the one-month bank bill swap rate, they offered a coupon pick-up of 80 basis points if not repaid in full in 2003. The structure allowed for the trustees, in the event of refinancing problems, to liquidate properties within the 18-month window before final maturity.

Among the positive qualities cited by S&P in support of the rating were the average 4.5-year expiry of the office leases and the high renewal rates. The 35.2% loan-to-valuation ratio was conservative compared to the 38% regarded as consistent with AAA; likewise the debt service coverage of 2.4 times (assuming interest rates of 10.5%) compared favorably to the minimum 2.2 times required by the rating.

The negatives included the refinancing risk; the ability of trust unitholders to wind up the trust or amend its constitution; the program's ability to issue additional Class A and subordinated notes, and the exposure of rental receipts to market and lease-maturity risk.

These were mitigated, respectively, by the 18 months before final maturity; onerous unitholder voting requirements; a clause restricting issue of additional notes in the absence of affirmation by S&P that the rating will be unaffected; and the diversity of tenants and their rollover profile.

In the event, the deal priced at 35 basis points over BBSW, squarely in the middle of the targeted range and representing a four basis point premium over the nearest comparable deal - a A$336 million fixed rate AAA-rated home loan securitization by RAMS Mortgage Corp. issued in early June. Westpac Institutional Bank - which led the deal, with Macquarie Bank as co-manager - described the pricing as a "good outcome."

Australian Mortgage Securities, a wholesale home loan finance business owned by ABN Amro Australia, launched its first issue in New Zealand with a NZ$150 million (US$69 million) deal.

The company has a New Zealand subsidiary which, earlier in the year, funded a NZ$375 million transaction in the Australian market. AMS (New Zealand) Fund 1 consisted of NZ$75 million of three-year fixed rate Tranche 1 notes rated AAA by S&P, NZ$66.75 million of 6.6-year AAA floating rate Tranche 2 notes and NZ$8.25 million of Tranche 3 subordinated notes rated AA-minus. Lead manager is ABN Amro NZ.

ANZ Investment Banking, which is planning at least 10 securitization deals for the remainder of the year, launched a A$500 million program, Stellar Funding Pty Ltd., to securitize corporate loans originated by its parent, ANZ Banking Group. The bank had about A$67 billion of corporate loans under management at the end of last financial year.

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