The Australian mortgage-backed securities market has once again become the focus of attention, with non-bank financier Australian Mortgage Securities Ltd pricing the biggest deal to date in the sector, and the announcement of a potentially controversial takeover offer by the local subsidiary of U.S.-based PMI Group Inc. for a British-owned mortgage insurer.
The moves, while modest enough in themselves, suggest that the local market - recently ignored by major issuers in the rush to issue overseas- is developing some interesting new dynamics.
AMS, which is owned by investment bank ABN Amro, sold A$900 million of monthly-coupon floating-rate MBS in three tranches known as ARMS II Fund X. The deal consisted of two senior tranches: $334 million with an expected average life of 2.6 years, and $539 million with a 4.2 year EAL, triple-A by Fitch, Moody's Investors Service and Standard & Poor's. It also included a $27 million subordinated tranche with an EAL of six years rated AA- by Fitch and AA by S&P.
ABN Amro, as lead manager, marketed the 2.6 year tranche between 31 and 33 basis points over bills, at 35-37 basis points over the benchmark for the 4.2-year tranche and "in the low 50s" for the subordinated paper. Pricing was finalized at 33, 36 and 52 basis points, respectively.
Although RAMS Mortgage Corp. sold A$1 billion of MBS under a single set of documentation during the market's mid-1990s boom, it did so in five separate A$200 million deals. The AMS deal is the first to have sold such a high volume of paper as a single marketable parcel.
As Elliott Levick, head of institutional sales at ABN Amro, pointed out, much of the appetite for the transaction resulted from the surge of offshore issuance by Australian issuers during the last 12 months or so.
"During the first half of the year we saw around twice as much U.S-dollar MBS as Australian dollar MBS, leaving healthy demand in the domestic market for a quality name like AMS," Levick said. "The structure of the transaction also generated a very strong interest from offshore investors keen to buy A$ MBS, providing for a wider distribution of the issue."
Levick's comments echoed those of RAMS chief financial officer Kieran Brush, following the successful completion last month of the company's third consecutive domestic deal, worth A$550 million. RAMS last issued offshore in late 1999. "Basically, since we started looking to go offshore 18 months ago, everyone has gone offshore. There are literally very few players funding domestically now, and this has created an opportunity for us," Brush said.
By "everyone," Brush meant Commonwealth Bank of Australia's Medallion Trust, National Australia Bank's HomeSide business, St. George's Crusade vehicle and SMHL/Members' Equity - all of which have issued in the global MBS market during the last 12 months, some for the first time.
On balance, the trend appears to reflect the ability of players to issue according to their comparative advantage. The biggest issuers deal offshore, particularly in the U.S.-based global market, where they can issue around $1 billion at a time. Dollar for dollar, these deals tend to be more expensive than issuing domestically. The abililty to finance such large lines of mortgages in one go, however, makes paying the premium worthwhile.
The trend has led to more Australian mortgages being securitized offshore than domestically during the last year or so. This may remain the case, but the domestic market may see some growth this year. According to ABN Amro, annualized domestic issuance half-way through this calendar year was $5 billion compared to the estimated $7 billion issued domestically during the whole of 2000. The trend is supported as much by strong supply as investor demand.
The housing market has staged a remarkable recovery this year, helped by a combination of low interest rates and a A$14,000 Federal Government grant for first-time homebuyers. Although these influences are temporary (interest rates have stabilized, and the grant coincides with an election year), they are potent. AMS treasurer, Andrew Zanchetta, said they largely accounted for a 20% increase in new loan business during the last six months.
One of the selling points for Australian MBS is the strong credit record of the country's home loans market. In the view of many ratings agencies, however, this has been partially offset by concern about the credit qualilty of the country's mortgage insurance industry.
With four players competing fiercely for business in a market worth about A$40 billion a year, balance sheets and margins are under pressure.
For this reason, ratings agencies welcomed the announcement by PMI Mortgage Insurance Australia (Holdings) Pty Ltd that it intended to buy its British-owned competitor, CGU Insurance Ltd. According to Moody's, the deal, if it proceeded, could introduce more discipline into the sector. At least one mortgage financier warned, however, that the reduction in the number of home loan insurers from four to three would lead to an increase in premiums.
The Australian Competition and Consumer Commission is investigating the deal, under which PMI would A$107 million, roughly the value of CGU's book at December 31.
NAB and HomeSide
One mortgage securitizer unlikely to tap the global MBS market again as an Australian-owned entity is HomeSide, now up for sale by parent company, National Australia Bank. NAB, which bought the U.S.-based business in October 1997, has written down the value of the acquisition by A$870 million, reflecting losses caused by a failed interest rate hedging strategy.