The Australian mortgage-backed market appears to be heading for another strong year, having finished the first quarter with more than A$10 billion transacted.

The figure was nearly twice the A$6 billion completed in the corresponding period last year and, on an annualized basis, comfortably ahead of the A$28 billion achieved during the whole of 2001. Roughly three-quarters of the total volume, or A$7.5 billion, was sold into the global markets which, as usual, absorbed the biggest deals that Australian securitizers had to offer.

The jumbo in this category was Commonwealth Bank of Australia's A$2.5 billion equivalent Medallion Trust Series 2002-1G, which was A$500 million bigger than its closest rival, Westpac Banking Corp's A$1.93 billion equivalent WST Series 2002-1G.

Three of the six domestic deals were for at least A$500 million, however, confirming that the domestic Australian market is continuing to accept far larger deals than used to be the case two years ago, when around A$150 million per issue was the norm. Adelaide Bank's A$750 million Torrent Trust 2002-1 was the biggest during the quarter, although the sector has seen transactions of more than A$1 billion.

Liberty diversifies market

Perhaps the most interesting domestic deal during the sector was Liberty Funding's A$500 million Liberty Trust Series 2002-1, for the light it shed on the increasing diversity of the domestic investor base.

Liberty is a Melbourne-based non-conforming home lender, which caters to borrowers who do not fit the lending criteria of banks and building societies. The deal puched Liberty's term debt issuance up to A$900 million YTD, and came soon after the company had set up a A$1 billion domestic asset-backed commercial paper conduit to replace its bank-sourced warehousing facility.

The term debt transaction was structured to include a one-year legal maturity, quite possibly the first time that such a short maturity has been used on a non-conforming MBS issue in the Australian market. This made the deal accessible to cash management funds and enabled investors with a mandate to accept short-dated securities, reflecting a push among securitizers to diversify their funding base away from borrowers focused on the longer end of the yield curve. "Issuers and arrangers are fine tuning their marketing. They're finding there's more competition because of a lot of issuance, and the market is now maturing," said an investment banker involved in the Liberty deal. "People are settling into what they like and don't like."

Initially, Liberty structured the floating-rate deal as a A$400 million offering consisting of A$130 million of Series A1 notes (the one-year legal maturity tranche) rated A-1+ by Standard & Poor's and Prime-1 by Moody's Investors Service; A$70 million of AAA/Aaa Series A2 notes: A$166 million of AAA/Aaa Series A3 notes and A$34 million of Series Band Series C notes, which were not rated.

The rated tranches were priced respectively as A$150 million with a weighted average life of 0.47 years, at 14 basis points over the one-month bank bill swap rate; $130 million over a 1.44-year WAL at 32 basis points over BBSW, and A$177.5 with 3.2-year WAL at 37 basis points over the benchmark. According to the investment banker, the one-year legal maturity had proved "very popular."

Macquarie enters the picture

The transaction also appeared to benefit from the fact that Salomon Smith Barney, which has been sole lead manager on Liberty's term debt issuers to date, was joined for the first time by a co-manager, Macquarie Bank. "Macquarie helped to bring more liquidity to the deal; investors like to see that; and the fit between the investors Macquarie brought and Salomon's was very good and very complimentary," said the banker. SSB's fellow Citigroup member, Citibank, provided the guarantee for the one-year maturity.

Macquarie's entry into the Liberty-SSB nexus is potentially significant for the financier's commercial plans. Macquarie arranged the ABCP program, and is helping Liberty to develop a portfolio of non-conforming auto loans with an eye to future securitization.

Among other deals to have priced recently was Torrens Trust 2002-1, with A$750 million being split approximately between a 2.96 year WAL fixed tranche and a 5.8 year WAL floating tranche, pricing at 44 basis points to bond and 37 basis points to swap respectively. The Compass Master Trust priced A$390 million of a soft-bullet three tranche structure comprising A$125 million of 2.66 year WAL, A$125 million of 3.5 year WAL and A$125 million of 4.5 year WAL pricing at 33 basis points, 35 basis points and 38 basis points above the benchmark, respectively.

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