Growth and innovation are set to be major themes in the Australian asset-backed markets again this year, following bullish forecasts from the major rating agencies and further evidence of growing sophistication among issuers.

Moody's Investors Service expects the overall volume of structured finance issuance to grow by 14% during calendar 2002, to A$32 billion, compared to the A$28.2 billion achieved last year. Although strong, the growth rate will be well down from the 34%, from A$21.1 billion to A$28.2 billion, recorded between 2000 and 2001.

Standard & Poor's expects more than A$10 billion of issuance in residential mortgage-backed securities alone during the first quarter this year, plus further growth in commercial mortgage-backed deals and the securitization of new asset classes, such as telecommunication company receivables.

On the technical side, National Australia Bank has become the latest issuer to offer an investor-driven vehicle providing exposure to repackaged assets in a choice of currency and pay-off profiles. The vehicle, called SCRIPT, has a A$1 billion ceiling and will issue in Australia, New Zealand, Asia, Europe and the U.S.

The move is an interesting one for NAB which, of the four major Australian banks, has been the slowest to embrace securitization: it launched its first mortgage-backed deal, for example, in only January of last year. That was through a program associated with its ill-fated U.S. mortgage servicing and finance subsidiary, HomeSide, which cost the bank A$4 billion in write-downs late last year (NAB has since sold HomeSide's operating assets to Washington Mutual, and is also understood to be negotiating to sell the loan servicing rights to Washington).

Although the HomeSide business was quite separate from NAB's other securitization operations, the HomeSide debacle has raised a question mark over the quality of the bank's risk management practices. NAB also has two corporate-loan repackaging vehicles Titan and Quasar with a combined issuance ceiling of A$8 billion.

According to a Moody's senior vice president in Sydney, Patrick Eng, NAB's entry into the market was a highlight of 2001. The deal was global, however, in contrast to another of last year's notable trends that of much larger domestic deals, culminating in RAMS Home Loans' end-of-year A$1.45 billion blockbuster (in local market terms).

Like his counterparts at S&P, Eng expects residential MBS to continue to dominate the market. "The willingness of issuers to structure RMBS to meet the needs of investors was more apparent than ever before in 2001, with money market and fixed-rate tranches being the most notable structured features," said Eng. The volume of commercial MBS deals tripled last year, from A$520 million in 2000 to A$1.6 billion.

Some of last year's

major developments

RMBS issuance of A$25.3 billion compared to A$19.5 billion in 2000, attributable mainly to increased issuance by major bank lenders, led by St. George and Commonwealth Bank of Australia

Cross-border MBS issuance jumped from $5.3 billion to $7.6 billion, helped by favorable cross-currency swap pricing. Cross-border issuance represented 56% of the total, compared to 45% in 2000

The volume of asset-backed securities dropped further, to A$1.1 billion from A$1.6 billion in 2000, with lower issuance of auto loans, credit-linked and lease-backed securities.

Looking ahead, Moody's expects cross-border issuance to remain strong, based on margin improvement in both the currency swap market and MBS pricing. It is also believed the fledgling non-conforming market was "here to stay," despite the fact that few deals had been completed - only A$250 million last year, down from A$416 million in 2000. "Performance of existing non-conforming RMBS... has been strong despite the limited history, with cumulative loss rates of 0.05% as of December 2001 for series 1999 issue," said Moody's.

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