Independent non-bank mortgage financier RAMS Mortgage Corp. has highlighted the changing dynamics of the Australian debt market for mortgage-backed issuers with the biggest deal yet of any description in the sector, weighing in at A$1.45 billion.

The transaction - lead managed by JPMorgan - was far bigger than the previous domestic MBS record, a A$1 billion deal earlier this year for Interstar Securities; and it easily outstripped the biggest straight corporate issue in the sector to date, also worth A$1 billion and completed by Anglo-Australian resources company BHP-Billiton earlier this month.

A trend toward larger deals

The RAMS deal took to a new level a trend for larger transactions that has been building in the domestic sector all year. Traditionally, the domestic MBS market has been the preserve of second-tier Australian securitizers who have not owned collateral in sufficient volumes to warrant issuing globally.

Domestic deals have typically been small - say, around A$350 million or so - compared to the US$1 billion (roughly A$2 billion) that the big-volume Australian securitizers deal in the U.S.-based global market.

At some point, it was inevitable that average deal size in the domestic market would grow as old MBS lines rolled off and investors sought replacement stock. This has indeed occurred, but other demand factors are also making themselves felt, not least the growing participation in the domestic market by offshore investors, made possible by the easing of Australia's interest-withholding tax regime.

The supply side has also grown, with originators writing record volumes, helped by low interest rates and a A$14,000 Federal Government grant to first-time home buyers.

The first signs of growth in domestic deal volumes appeared in June, when RAMS sold A$555 million of MBS through its Series 10 deal. The following month, Australian Mortgage Securities sold A$900 million and, later, Interstar completed its $1 billion deal. RAMS initially approached the market for its latest deal, 2001-11, with a $900 million offering, half of which consisted of mortgages originally funded by the company's Series 2 deal in 1996 and needing to be refinanced.

The balance consisted of warehoused loans. The deal was increased to meet investor demand and the final amount consisted of A$1.2 billion of refinanced Series 2 mortgages and warehoused loans, and A$250 million of pre-funding.

Targeting offshore investors

According to RAMS treasurer Rowan Harry, the single most important factor in pushing the size of the deal beyond A$1 billion had been the strength of demand from European investors. The deal was the first domestic transaction that RAMS had marketed to offshore investors.

RAMS is well known in Europe, having issued into the eurobond market several times, but Harry and chief financial officer Kieran Brush make a point of visiting offshore investors regularly (even in the U.S., where RAMS has yet to issue) to keep them up to speed with the company's activities. "Because of the refinancing, we did a bit of a pre-roadshow with those accounts that held existing Series 2 bonds. Some of those investors don't buy any more, but we made a point of seeing them and they bought the deal. They liked the collateral."

Deal details

RAMS' attention to marketing was evident in the elaborate deal structure, which consisted of four tranches as follows:

Class A1: A$400 million floating rate with an average life of 2.72 years

Class A2 fixed: A$286 million (soft bullet) with an AL of 3.67 years

Class A2 floating: A$100 million, AL of 3.57 years

Class A3: A$609 million floating rate, 5.34 years

Class B: A$56 million floating rate, 5.5 years.

All senior tranches were rated AAA and Aaa by Standard & Poor's and Moody's Investors Service while the subordinated Class notes were rated by S&P only, at AA-. Pricing on the Class A2 5.7% fixed-rate bonds was not available but the other tranches priced at 34, 35, 39 and 50 basis points over the one-month bank bill swap rate respectively.

Harry said the pricing on the A1 tranche had been the same as that on the corresponding 2.9-year average life tranche of the Series 10 in June, despite the fact that the later deal was much bigger and that credit spreads generally had moved out since the earlier deal took place.

Nearly 30% of the deal was sold to European and Asian accounts. Harry described them as a "mixture of banks and funds," all of which had a natural ability to fund in Australian dollars.

The growing compatibility between the Australian and European markets, helped by growing links between their respective bond clearing houses, was beginning to make the concept of domestic deals and "A$-denominated eurobonds" dated, said Harry, who suggested that such deals in future would simply be classed as "A$-denominated deals." Series 2001-11 was transacted under different documentation which "mirrored a euro-style format."

Other deals to have launched and priced in the last few weeks, confirming this year as a record for domestic MBS issuance, included A$500 million for Superannuation Members' Home Loans Securitisation Fund, a deal by Citibank's Compass Master Trust and a A$250 million commercial MBS deal for Investa Properties Ltd.

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