Macquarie Bank, Australia's biggest domestic investment bank, and AM Corporation, a privately owned funds manager, have each launched technically innovative structures that they claim to be world-firsts.
Macquarie is securitizing a portion of the credit risk on a A$1 billion portfolio of motor vehicle and equipment leases, while AM Corp. is securitizing the maturity cash flows on a A$295 million pool of endowment policies.
According to Macquarie, the Synthetic Master Asset Receivables Trust (SMART) represents the first time that lease and equipment receivables have been securitized synthetically in the capital markets "anywhere in the world." The platform for the deal is the purchase by a subsidiary, Macquarie Leasing, of a credit performance guarantee from the SMART special purpose entity. SMART in turn collateralizes its obligations under the guarantee by issuing credit-linked notes and entering into a credit default swap with an international bank.
The identity of the counterparty to the A$850 million swap is being kept confidential, except for the fact that it is domiciled in an OECD country. The A$130 million credit-linked note issue is split into three tranches: A$75 million of Class A notes rated Aaa' by Moody's, with a weighted average life of 5.3 years; A$35 million of Class B notes, rated A1 and A$20 million of Class C notes rated Ba2, both with WAL of 5.5 years each. The legal maturity on all three tranches is July 2009.
The deal, which was expected to price after press time, was being managed by Macquarie. The rating on the Class C notes was unusually low for the Australian market.
Proceeds from the note issue will be kept on deposit at Macquarie until needed to offset losses on the lease portfolio. The swap counterparty ranks ahead of the AAA noteholders, who are protected by the subordinated tranches and a A$20 million first-loss facility that sits beneath the Class C notes. The deal helps Macquarie to reduce the regulatory capital that it is required to hold against the leases. According to executives involved in the transaction, synthetic lease transactions of this nature could prove to be a cheap and easy alternative to conventional lease securitizations.
AM Corp said it would publicly offer A$185 million of notes backed by endowment policies, in a deal led by SSB. AM Corp. dominates the market in traded life insurance policies in Australia, buying around A$100 million a year through a pooled superannuation trust. The company sees securitization as a way of increasing market liquidity.
An underwriting life company usually repackages a life policy as an endowment policy with a five-year life (the life insured remains the same) once it is sold into the secondary market. Once in AM Corp.'s pooled superannuation trust, the instrument effectively behaves like a five-year security. The premiums on the underlying policy are paid from cash inflows to the trust, while the returns to trust members are paid out from maturing policies. The Securitized Traded Policies Trust No.1 transaction draws on the cashflows from maturing policies.
The deal consists of A$185 million of A1 units rated AA' by S&P, and two unrated tranches: A$10 million of A2 units and A$100.7 million of B units. The unrated notes will be held by AM Corp. and will provide a yield kicker for its superannuation trust, as will the longer duration gained by removing the five-year maturity cashflows from the trust pool.
Investors were expected to keep a close watch on the rating, which is tied to the AA'/negative outlook ratings of two life companies, AMP and MLC, which originated the underlying policies.