Net interest margin (NIM) mortgage securitizations may be commonplace in the U.S., and are even considered a driving force in the home equity sector's boom in recent years, but other markets have been slow to catch on. Given how Australia has the second biggest RMBS market behind the U.S., it is perhaps surprising that NIM issues haven't grown on the radar Down Under at a similar pace.

Last week, Interstar Millenium, the monoline mortgage spinoff of financial services company Challenger Financial, completed its first NIM offering, two years after the only other term effort seen in the domestic capital markets since 2002. Although other monoline originators, such as Australian Mortgage Securities (AMS) and RAMS Home Loans, have completed private and conduit placements in the past 12 months, InterStar's A$180 million ($128.7 million) transaction is the first public NIM issue since AMS issued a A$95 million deal in 2002.

ABN AMRO and Macquarie Bank are joint leads on the issue - called Interstar NIM Master Trust 2004-1 - backed by residual income from five unrated warehouse facilities and 19 RMBS trusts. Interstar gets to keep senior fees from its role as servicer and trust manager.

The deal, which has a 14.75-year legal final maturity, is split into three senior tranches, all rated single-A by S&P. The A$30 million A1 notes, with 1.5-year average lives, priced at 70 basis points over the bank bill swap reference rate (BBSW), the A$100 million A2 three-year paper priced at 85 basis points over BBSW and the A$50 million seven-year A3 bonds came in at 110 basis points over.

Standard & Poor's conservatively estimates the borrowing base, the present value of ratable cash flows to the master trust, to be $227.6 million. Neither Fitch Ratings nor Moody's Investors Service rated the transaction.

Aside from overcollateralization, credit support comes from 100% loss insurance and a minimum of 12 months timely payment cover for the loans. As servicer, Interstar is also obliged to add 0.25% for each loan over the minimum amount required to meet all the issuer costs.

ABN and Macquarie have created an open pool structure, so all 80,000 loans in Interstar's A$13.8 billion portfolio can be tapped to support the NIM collections, regardless of which trust or warehouse facility they are held.

Net-interest margin securitization in non-U.S. markets has yet to see the explosive growth witnessed in the U.S., primarily because the majority of mortgage lenders in Europe and Australia are large and diversified financial institutions, rather than specialty mortgage lenders, as is the case in the U.S.

"There are very few foreign issuers that have a need to issue NIMs," one U.S. banker said. "In Australia, InterStar and AMS are probably the only one."

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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