Evidence of the Australian market's growing comfort with securities backed by assets other than prime mortgages continues to surface, with Standard & Poor's Ratings Services upgrading from single A to AAA the ratings on transactions securitising auto and equipment-lease receivables originated by Orix Australia Ltd.
The two deals, which took place in late 1998 and early 1999, were originally worth a total A$300 million.
The move follows ratings upgrades by the agency on two non-conforming mortgage pools and affirmation of the AAA rating of a sub-prime home loan pool. Although the Orix and other pools are not strictly comparable, each has developed an impressive performance track record and a level of investor acceptance that bodes well for the introduction of more programs with unconventional structures and/or assets.
The Orix upgrades apply to two transactions - Eden Park Trust No. 1 and Eden Park Trust No. 2 - arranged by the former Bankers Trust, which has since been merged into Macquarie Bank.
The deals were the first of their kind in the Australian market, and conservatively enhanced by subordination: in the case of EPT1, for example, the subordinated tranche was supported by a seller note. In all, the AAA senior tranches had credit support equivalent to 43 times historical net losses. As the performance of the pool has become established, and more local market data has become available, S&P has fine-tuned its rating based on the credit enhancements in place.
Liberty Deal Prices
According to Fabienne Michaux, the agency's head of structured finance ratings in Australasia, such opportunities are greatest in the initial stages of a particular market segment's development. "As additional data becomes more available on these asset classes, our rating approach on new transactions will start to reflect the decreased level of uncertainty, culminating in lower credit support levels and more flexible structures," Michaux said.
Investors take a similar view, judging by the pricing achieved by sub-prime financier Liberty Financial which brought its second A$100 million transaction to market during the month.
Liberty securitised the market's first sub-prime mortgage pool (liberally defined in Australia market to include high loan-to-valuation ratios, as well as borrowers with chequered credit histories) a year ago through Salomon Smith Barney. Earlier this year, market data compiled by S&P showed that 17.5 percent of the pool was experiencing delayed repayments - an astronomically high proportion by local standards (according to Liberty, many borrowers had overspent at Christmas and were having trouble juggling their mortgage and credit card repayments).
In October, S&P affirmed the deal's AAA rating, noting that the level of delinquencies was "within rating expectations" (the proportion of loans in arrears had come down to 13%).
When Liberty launched Series 2000-1 earlier this month, both S&P and Moody's Investors Service rated the $91.5 million of senior notes triple-A. According to S&P, the credit quality of the loans was only marginally better than those in the first deal (although delinquencies on the second pool were just 1.7%).
Structurally, however, the second deal was better in that it allowed the excess spread to be captured in a reserve account, which will meet principal charge-offs of up to A$1.5 million.
This enhancement meant that the proportion of subordination could be reduced to 8.5%, compared to the 10% used on the first transaction. At pricing (again through Salomon Smith Barney), the A$51.5 million Series A1 senior notes firmed at 32 basis points over the bank bill swap rate compared to 35 basis points for the comparable tranche in the first deal; and the A$40 million Series A2 senior notes were priced at 45 basis points compared to 47 basis points.
Pricing for the privately placed, unrated Series B and Series C notes and the subordinated tranche were not disclosed. The deal was oversubscribed with 75 per cent of the investors buying paper backed by Liberty loans for the first time.
"More and more, we are assigning ratings to deals where the ratings are based solely on our credit assessment of the pools themselves," said Michaux. "Importantly, the investor base is there now where it wasn't a couple of years ago. Investors are more willing to take on these deals as they become more familiar with the risks and as they continue to look for yield pick-up."
David Jones CMBS
The market's boundaries have been pushed out in another direction by a A$133 million issue of commercial mortgage-backed securities on behalf of retailer David Jones.
The deal, lead managed by Deutsche Bank, is part of an elaborate A$366 million sale-and-leaseback package. Significantly, A$166 million of the overall figure reflects the value of refurbishment work: the deal is thought to be the first rated by S&P involving a portfolio under refurbishment.
The notes, to be issued through CBD Retail Infrastructure (No. 1), have a June 2005 scheduled maturity and final maturity two years after that. S&P has assigned a preliminary AAA rating to the $54 million of Class A floating rate notes; AA to the $20 million of Class B notes; single A to the $16 million of Class C notes and BBB to the $43 million of Class D notes. The pricing range for the notes had not been disclosed as ASRI went to press.