The mortgage-backed sector was the first Australian capital market to resume operations after the September 11 attack on the United States, beginning with the launch of a A$1 billion domestic deal for Interstar Securities.
The deal was significant not only for being the biggest yet in the Australian domestic MBS market but also, according to Interstar's managing director, the first debt deal of any description worldwide to be launched after the attack.
It was quickly followed by the relaunch and repricing of the debut global MBS by Macquarie Securitisation, one of the country's biggest non-bank mortgage financiers, which sold $1.2 billion through its PUMA flagship vehicle. TORRENS Trust, a special purpose vehicle managed by Adelaide Bank, priced a A$600 million deal which had been delayed in the aftermath of the attack.
It was not all quite business as usual, however. The ratings on A$2.08 billion of subordinated Australian MBS across 54 different deals, domestic and international, were thrown into doubt when Standard & Poor's placed the AA- rating of British insurer Royal & Sun Alliance on creditwatch negative after the attack. Royal & Sun Alliance is a major player in the Australian home loans insurance market.
Significantly, the ratings agency indicated that the AAA ratings of some senior debt tranches could potentially be affected.
Healthy market, good timing
The fact that the domestic market was prepared to accept a deal of record size and that global investors were willing to welcome a new Australian issuer, appeared to reflect the Australian MBS market's strong fundamentals.
Domestic deal sizes have been growing this year, although they are still well short of the A$2 billion equivalent typically issued by Australian securitizers into the global market. The biggest previous domestic transaction was the A$900 million ARMS II Fund X deal by Australian Mortgage Securities, a subsidiary of ABN AMRO, in July.
Interstar is no newcomer, claiming to have launched its first MBS as long ago as 1978. The company is relatively small, however, and remains wholly owned by executive chairman, Vernon Spencer. Its more recent issuing history consists of eight domestic and two European deals totaling A$5.1 billion equivalent.
According to Spencer, the fact that Interstar is the first to break the A$1 billion mark in the Australian market reflects the investor relationships it has built up through its long track record and its view of itself as an "investment manager."
He concedes other factors are at work: record low interest rates (fixed-rate home loans were at 10-year lows before the latest rate cut by the Reserve Bank of Australia on October 3), a Federal Government grant of A$14,000 to first-time homebuyers (this is an election year) and demand for rental properties sparked by the rising cost of home purchase (the Interstar portfolio does not distinguish between rental and owner-occupied properties, all being fully mortgage-insured).
The Interstar Millennium Series 2001-2 Trust consisted of five tranches, including four senior tranches rated AAA by Standard & Poor's and Fitch. Three of the four were vanilla floating rate: Class A2 consisted of $200 million, with a weighted average life of 1.6 years; Class A3 was $200 million with a WAL of 2.8 years; and Class A4, $475 million with a 5.3 year WAL.
The A$55 million A4 tranche was structured and carried an AAAr rating from S&P, AAA from Fitch. The WAL was 5.3 years. The subordinated, floating rate B tranche was rated AA- by both agencies and consisted of A$70 million with a WAL of six years. All tranches - which have a final maturity date on December 7, 2034 - are callable on October 7, 2002.
Pricing was said to have at spreads that were towards the top of the marketed range (the marketed range was not disclosed, however. Of the three senior tranches, Class A2 priced at 27 basis points over one-month BBSW; Class A3 at 32 basis points over three-month BBSW; and Class A4 ($475 million, 5.3 years) at 37 basis points over one-month BBSW. The pricing of the A4 structured tranched was kept confidential, while that of the subordinated B tranche was 57 basis points over one-month BBSW.
Macquarie Bank was lead manager, arranger and bookrunner with National Australia Bank co-lead manager and CIBC World Markets co-arranger.
Macquarie, Adelaide deals
Macquarie Securitisation's $1.2 billion PUMA Global Trust No. 1 consisted of a $1.158 billion senior tranche with an expected average life of 3.4 years, and a $42 million subordinated tranche, which had a seven-year EAL.
The senior tranche priced at 22 basis points over three-month Libor, the subordinated tranche at 49 basis points over the benchmark. Lead manager was Deutsche Banc Alex. Brown, with Salomon Smith Barney and Credit Suisse First Boston as co-managers for the senior tranche.
Adelaide Bank's Series 2001-1 TORRENS Trust consisted of A$360 million of fixed rate Class A notes priced at 29 basis points over one month BBSW and A$223.5 million of floating-rate Class A2 notes priced 39 basis points over the benchmark. Pricing for the subordinated A$16.5 million floating-rate Class B notes was not disclosed. The weighted average margin over time was said to have been equal to the lowest set for a local MBS deal this year.
Both the TORRENS and Interstar subordinated tranches appeared among those listed by S&P as having been placed on negative credit watch.
In keeping with Interstar's usual practice, the proportion of subordinated debt in its structure was an unusually high 7%. Given that S&P recommends 5.5% credit support for AAA MBS before credit is given to mortage insurance, the senior Interstar tranche appears to be relatively well protected, should Royal & Sun Alliance be downgraded.
