The Australian mortgage-backed markets are displaying new depths - and may even be showing the first signs of maturity - with the entry of Commonwealth Bank of Australia (CBA) to the global MBS market through a US$955 million issue, and the return of St. George to the domestic arena with a A$600 million (US$365 million) transaction.
The deals were announced on the same day, as if to emphasize the diversity of funding opportunities open to major issuers and to explode two widely-held notions: that the domestic market is too small to accommodate large (by Australian standards) deals; and that the global market - or at least the predominantly U.S. investors therein - face a steep learning curve when evaluating Australian MBS issuers. There is, in fact, some truth in each of these notions. CBA and St. George appear to have demonstrated, however, that shrewd marketing can help overcome such obstacles.
CBA's 2000-1G Medallion Trust transaction consisted, unusually, of a global and domestic tranche of AAA-rated senior notes. The US$955 million Class A1 senior notes had a weighted average life of 3.3 years, while the A$150 million Class A2 domestic tranche had an expected life of 5.7 years.
There was also a subordinated A$15 million Class B tranche rated AA by, Standard & Poor's and Fitch IBCA. The global tranche had still to be priced as ASRI went to press, but the domestic notes were sold at 39 basis points over bills.
This was one basis point wider than the historical average margin for Medallion's domestic MBS deals. According to one CBA executive, the widening - though nothing to worry about - reflected the impact of the coincidental St. George announcement. J.P. Morgan was lead manager for the global tranche, with Merrill Lynch, Deutsche Bank and Credit Suisse First Boston as co-managers. CBA led the domestic deal with co-managers Macquarie Bank and Warburg Dillon Read.
The bank, which is Australia's biggest mortgage financier, is the third Australian bank after Westpac Banking Corp. (through its Westpac Securitisation Trust) and St. George (Crusade Global Trust) to access the global MBS market.
Although both WST and Crusade have both performed well, there is a perception among Australian MBS issuers that their credit story is less well understood in the U.S. than in Europe, and that they have to make a particular effort to sell themselves to North American investors.
In what might be described as a spirit of mutually supportive self-interest, Australians have even begun sharing platforms at U.S. industry conferences to market their mortgages as a generic asset class, reverting to normal commercial rivalry once they step off the podium.
According to Leanne Leong, CBA's head of securitization, however, U.S. investors appeared surprisingly knowledgeable about the bank during the roadshow, and the deal was three times oversubscribed at the indicative pricing range. "The transaction was very well received.... We were quite surprised," said Leong.
Among the factors she suspected of having helped raise CBA's profile among investors was a stamp of approval given to its loan servicing capability by Fitch. Although the agency did not assign a formal servicer rating, it published a detailed report of the bank's capabilities in this respect and assessed them as "satisfactory".
A number of other Australian MBS issuers, notably Westpac and RAMS Mortgage Corp., have acquired formal servicer ratings in recognition of the value placed on them by offshore investors.
St. George's deal - the third domestically by the Crusade Trust - consisted of a A$345 million fixed-rate, October 15, 2002, tranche and a A$255 million floating rate tranche with an expected average life of 6.5 years. Deutsche Bank was lead manager with St. George as co-manager.
The deal extends the trend established earlier this year when PUMA Finance, the securitization vehicle managed by Macquarie Bank subsidiary, Macquarie Securitisation, broke domestic records with a A$750 million transaction, also led by Deutsche Bank.
Ever since the larger MBS issuers began accessing offshore markets in 1997, the domestic market has been perceived to be incapable of supporting deals of much more than A$300 million.
As with the CBA global and the servicer report, however, marketing is the key: in St. George and PUMA's case, the trick lies in structuring the transactions with fixed and floating rate tranches to target particular investor segments (including, for example, conduits funded by commercial paper).
A senior executive at St. George said the bank had perceived, "strong domestic investor demand for this type of structure, in particular the fixed rate tranche". He added that the domestic market offered better pricing, because the bills/Libor0 basis swap had widened - no doubt thanks in part to CBA's global.
The fixed rate component of the Crusade transaction may also have stacked domestic pricing in St. George's favor. CBA, for example, claimed to have achieved better pre-swap pricing in the global market than it would have done domestically. The Medallion transaction consisted entirely of floating-rate paper.