Australian issuers of mortgage-backed securities in the Euromarkets are diversifying their funding strategies to avoid what they regard as a funding squeeze similar to the one that has driven them out of the domestic market.
Rams Mortgage Corp., the country's second-biggest non-bank originator, last week issued the equivalent of A$1.15 billion (US$750 million) in a mixture of U.S. dollars and euros, tapping the euro-denominated market for the first time.
Kieran Brush, the company's head of securitization, said the deal had been structured to meet demand from specific investor groups, but that one of the advantages of issuing in euros was that it introduced Rams to new investors.
This was desirable, given the explosive growth in the European MBS markets during the last 12 months, and the emergence of regular issuers from such countries as Belgium, France and Ireland, Brush said. Previously, the U.K., Spain and Australia had dominated the European MBS market, with Australia accounting for about 25% of the sector earlier this year. That proportion was likely to shrink to around 15% of gross issuance by the end of the calendar year, Brush added.
The major Australian MBS issuers, bank and non-bank, quickly outgrew the small domestic market and began issuing in the Euromarkets two years ago. Two of them Westpac Banking Corp.'s Westpac Securitisation Trust and St George Bank's Crusade Trust have already diversified beyond the Euromarkets by issuing globally. RAMS is not the first securitizer to issue in euros: a conduit managed by SG Australia refinanced MBS issued by Resimac, an affiliate of the New South Wales-based Fanmac, in euros earlier this year. Rams is the first to have tapped euros in significant volume, however.
Series-7E, as the deal was labeled (Rams' seventh securitization overall, and its third in the Euromarkets), consisted of three tranches, the largest of which was US$480 million of Class A senior notes with an average expected life of 4.5 years and rated triple-A by Standard & Poor's, Moody's and Fitch IBCA. This was supported by a E23.4 million tranche of Class B subordinated notes with a 5.8 year average expected life, rated double-A by S&P and Fitch.
The third tranche consisted of pass-through notes which refinanced domestically-issued MBS. The original notes, issued in 1997, were subject to a two-year substitution period then a step-up and call option which was shortly to become exercisable. The tranche believed to be the first refinancing of domestic Australian MBS in the Euromarkets consisted of E228 million with a 1.6 year average expected life and triple-A ratings from all three agencies. The short average life reflected the fact that the notes started amortizing from the day of issue.
The tranches priced at 36 basis points over US$ Libor and 68 and 25 basis points over Euribor respectively. According to Brush, the pricing was similar to that on Rams' previous Eurobond in May, on a weighted average maturity over time basis. While satisfied with the pricing, Brush said the most pleasing aspect of the deal had been the fact that it had cleared quickly, given the growing nervousness of investors, looming supply and tightening liquidity as Y2K approached. J.P. Morgan was lead manager with Deutsche Bank as co-lead; no other banks were involved.
First Australian Finance Lease ABS ... Perhaps
Diversification continued to be a key theme in the domestic market, where auto financier ORIX Australia made its third issue under its Eden Park Trust program.
The program, initiated by Bankers Trust in late 1998, was one of the first in Australia to securitize commercial hire purchase (CHP) contracts. BT's investment banking business in Australia was acquired by Macquarie Bank in July, and the program effectively continues to be run by the original BT team. Macquarie, keen to publicize its rising profile in the asset-backed market, claimed that Eden Park Trust 3 was the first in Australia to securitize finance leases.
This was disputed by SG Australia, which claimed to have been first with its SoGeLease transaction. Macquarie retorted that the SoGeLease deal involved assets originated by SocGen and retained some dependence on SG's credit rating. Such arcane disputes are part of the Australian market's charm; this one remained unresolved at presstime.
The legal and accounting status of finance leases created some interesting structural challenges for EPT3. Under a finance lease, the rights and benefits of ownership transfer to the end-user as soon as the lease is written (there is no transfer of ownership under a CHP contract until all lease payments and the residual have been paid).
This means that the beneficiaries of a finance lease are liable to pay income tax on the income they receive, although they can offset the liability with deductible expenses. From a credit ratings perspective, the potential for tax liabilities to be insufficiently covered by deductible expenses was a problem. Macquarie said it had solved it by making the trust the beneficiary of all income from the finance leases.
Wide-ranging business tax reforms will render the solution inoperable in two years, however, when a new "single entity regime", which effectively taxes trusts as companies, is introduced. By that time, however, the trust is expected to be in a tax-loss position, with investors suitably protected from any tax liability. This is understood to be a key element underpinning Standard & Poor's triple-A rating for the senior notes.
The A$297 million deal consisted of A$155 million of Class A1 senior notes with a legal final maturity of one year and an expected average life of 0.47 years; A$112 million of Class A2 senior notes (three and 1.56 years), and A$25 million of Class A3 senior notes (5.5 and 2.64 years).
The transaction also included A$5 million of subordinated Class B notes rated single-A (5.5 and 2.67 years) and an A$8 million seller note. The senior and subordinated tranches were priced at 17, 29, 38 and 80 basis points over the 30-day bank bill swap rate respectively.
