The market for Australian mortgage-backed paper continues to diversify and deepen, as the larger securitizers which normally finance themselves offshore return to the domestic market, while second-tier firms make their cross-border debuts.

The latter trend is particularly striking, given the cost of the cross-currency swap, which has become prohibitive for many Australian borrowers as a result of US$3.5 billion of vanilla offshore bond issuance by major Australian banks during the first half of the year, and subsequent swapping back to the domestic currency.

Three second-tier securitizers - Adelaide Bank, Members Equity and Interstar Securities Australia - have launched their first offshore deals, claiming that the premium they expect to pay will be justified by the diversification they will gain for their debt portfolios.

Adelaide Bank aims to raise US$715 million in the European and U.S. markets. Although a medium-size player in the Australian market, the bank has the distinction of having initiated the Australian bank securitization market in the early 1990s.

Its Series 2000-1G Torrens Trust is its first offshore transaction and consists of a US$715 million senior Class A tranche and A$47.9 million of subordinated domestic Class B notes. The tranches have been rated AAA/AA-minus by Standard & Poor's and AAA/AA by Fitch IBCA. ABN Amro is lead manager.

Members Equity, a joint venture between French financial services group AXA Australia and industry superannuation funds manager Industry Fund Services, has begun marketing a US$700 million global mortgage-backed transaction through Credit Suisse First Boston.

The deal consists of three sequential-pay Class A bonds and a subordinated Class B tranche. S&P, Fitch and Moody's Investors Service are expected to assign triple-A ratings to the senior tranche, and AA/AA/Aa2 ratings to the subordinated paper. Few other details were available. The issue, on which ABN Amro is co-manager, was expected to price on June 19.

Interstar's decision to market a US$465 million deal in Europe surprised the Australian market, which has long grown accustomed to the strong views held by the company's managing director, Vernon Spencer, about the relative pricing inefficiency of offshore issuance.

From an Australian issuer's perspective, offshore transactions normally only make sense financially if they can be done in volume; so all three offshore deals suggest that the respective issuers are reaching critical mass in terms of the new business they are writing.

The offshore tranche consists of the Millennium Series 2000-3E transaction and was rated AAA by S&P; the A$60 million onshore subordinated component received AA-minus ratings.

The deal is notable also for the fact that the joint leads are Australia's Macquarie Bank and Britain's Barclays Capital. The partnership has enabled Macquarie to take a lead manager's role on an offshore issue for the first time, while Barclays is leading its first MBS transaction for an Australian issuer. The banks are looking at ways of putting the partnership on a longer-term footing.

Meanwhile, RAMS Mortgage Corp, the country's second biggest non-bank home loans financier, made a surprise visit to the domestic market with a A$600 million transaction. The RAMS Series 8 transaction consisted of a A$336 million fixed-rate Class A1 notes maturing May 2003, A$234 million of privately placed floating rate Class A2 notes and A$30 million of subordinated Class B notes.

RAMS, like most of the biggest securitizers, has focused on issuing offshore since 1998. Its return to the domestic market was influenced partly by the cost of the cross-currency swap. It priced the fixed rate tranche at 31 basis points over the swap curve, in the middle of its 30-32 basis point marketed range.

Moody's and Fitch rated the notes triple-A. Interestingly, the deal was the first ever public term debt issue by an Australian not to have been rated by S&P, and reflected a push among market participants to open the ratings business to more competition.

Other domestic deals either launched or announced include a A$100 million ARMS II Fund VII private placement for Australian Mortgage Securities, a subsidiary of ABN Amro, and a A$280 million MBS transaction for RMT Securitisation No. 4. AMS priced its A$97.5 million of AAA 2.5-year soft bullet senior notes at 28 basis points over the three-month bank bill rate, while the AA-minus subordinated debt priced at 69 basis points over the three-month bank bill swap rate.

Although these deals offer evidence of the resilience of the Australian MBS market in a rising interest rate environment, there are signs that attention in some quarters is being focused increasingly on potential credit problems.

Moody's, for example, published research advising investors to scrutinize the claims-paying ability of the mortgage insurers that stand behind nearly all Australian MBS transactions. The warning appeared to be directed at offshore investors, as the marketing of Australian MBS offshore frequently highlights the credit enhancement provided by mortgage insurance as well as subordination.

Although none of the five Australian mortgage insurers appears to be at immediate risk of a ratings downgrade, Moody's made the point that "any changes in the insurance financial strength rating of any mortgage insurer ... may result in insufficient level of subordination needed to maintain the rating of the MBS."

A survey by S&P, meanwhile, showed that arrears on a A$100 million pool of non-conforming loans securitized by Melbourne-based Liberty Financial were running at a whopping 17.5 per cent. This was less than six months after the loans had been securitized in a deal led by Salomon Smith Barney. Such loan pools are rare in the Australian market, which continues to feel its way down the credit curve. According to Liberty, however, the arrears reflected seasonal factors and would quickly revert to more acceptable levels.

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