New Zealand's fledgling mortgage-backed securities market is off to a flying start, judging from the way investors snapped up the first Euromarket issue backed by New Zealand residential mortgages earlier this month.

The landmark NZ$825 million ($438.8 million) transaction, backed by home mortgages originated by WestpacTrust, is only the second New Zealand MBS transaction to be sold overseas and thanks to the success of previous Australian MBS deals in the Euromarket, investors seized upon it, highlighting the similarities between the Australian and New Zealand mortgage markets.

"Investors liked Australian mortgages, and so they loved New Zealand," commented a syndicate official at Morgan Stanley in London, which co-led the transaction with Westpac Banking Corp. "This asset class is even better, since it has higher subordination, lower delinquencies, and lower loan-to-value ratios. There is certainly enough demand for repeat deals."

The notes were chopped into three chunks, one denominated in U.S. dollars and the other two in Aussie dollars, and issued via a funding trust called WST Funding Trust.

The $356.7 million Class A1 notes priced at 25 basis points over three-month Libor, while the pricing on the A$100 million Class A2 notes and the A$23.75 million Class B notes was undisclosed.

Only Class A1 was publicly offered, with the other two classes being privately placed in Australia. Fitch IBCA and Standard & Poor's rated the top two classes triple-A, while Class B was rated double-A minus by Fitch and double-A by S&P. Final maturity of the notes is December 2030.

Besides the low weighted average loan-to-value ratio of roughly 53%, another strong selling point for European investors was diversification in the form of the insurance pool policy covering all loans provided by CGU Lenders Mortgage Insurance Ltd.

"CGU is the biggest insurer in New Zealand and also has a presence in Australia. This offered diversification for the Euromarket, in terms of insurance providers," said Susan Bannigan, head of group securitization at Westpac Banking Corp. in Sydney.

Going forward, WestpacTrust will likely tap a wider audience with another global MBS issue, she said. "This deal gives WestpacTrust competitive advantage, since it's the only New Zealand bank accessing the markets in this fashion," she added.

Given the small number of New Zealand MBS issues to date - five, including this one - it is too soon to speak of a domestic MBS market. Yet New Zealand mortgages have a number of strengths which make them particularly suitable for securitization, a recent J.P. Morgan report said.

Those strengths include relatively low levels of unemployment, steady appreciation of property values in the mid-1990s, economic diversity in the three major population centers, and a recovery process in cases of default that is faster than Australia's.

"New Zealand mortgages are a virtually untapped pool of high credit quality collateral, [and] investors should consider them as a potential diversification opportunity from Australian MBS," the report concluded. - Vivian Chu

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