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Incorporating Australian
Securitisation & Covered Bonds
>> Issue 02
2012
AUSTRALIAN
SECURITISATION
JOURNAL
Australian structured product:
custom tted for on- and offshore needs
1
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We see Australian business. ConLacL !ohn 8arry on +61 _ 8641 418_.
No.1 AsseI-8acked
SecurIIIes 8ookruhher
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dehomIhaIed Irahches
oI AusIralIah RM8S
PIoheered IhhovaIIve
mulII-currehcy, alIerhaIIve
markeI RM8S sIrucIure
(SMHL Seres S 2o121)
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IrahsacIIohs Ior 2o12
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cohIormIhg secIors
(DOL 1rusL Seres 2o121, PkS)
We do.
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envronnenL lor AusLralan ssuers, openng up ollshore
opporLunLes and alLernaLve local narkeLs.
Who understands
that debt markets
are always evolving?
1.
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. _. 6.
CONTENTS
FOREWORD
WELCOME
ASF INSIGHTS
Q&A
COVERED BONDS
HOUSING MARKET
ROUNDTABLE
LEGAL EYE
Q&A
Q&A
ROUNDTABLE
FEATURE
ISSUER PROFILES
The Hon. Wayne Swan MP
Deputy Prime Minister and Treasurer of Australia
Chris Dalton
CEO, Australian Securitisation Forum
The Australian Securitisation Forum
outlines its efforts in an ever-changing
structured product market environment.
Tim Hughes
Chairman, Australian Securitisation Forum
Standard & Poors explains
its ratings rationale and where
Australia fits into the global picture.
The Reserve Bank of Australia
looks at the state of play in the
Australian housing market,
including lending standards.
US investors and Australian issuers talk
international RMBS demand, facilitated by
National Australia Bank.
Sidley Austin partners discuss the consequences
of a landmark post-Lehman legal decision for the
Australian market.
Greg Tanzer
Commissioner, Australian Securities and Investments Commission
Guy Debelle
Assistant Governor, financial markets, Reserve Bank of Australia
RMBS in the Australian domestic market:
a buy- and sell-side perspective hosted by
Commonwealth Bank of Australia.
Taking the pulse of Australian structured finance
following the arrival of covered bonds.
Key asset class data on Australias
first clutch of covered bond issuers.
2
4
6
10
11
16
18
28
31
32
34
44
51
ANZ Banking Group
Commonwealth Bank
of Australia
51
52
54
55
National Australia Bank
Westpac Banking
Corporation
AS
Incorporating Australian
Securitisation & Covered Bonds
>> Issue 02
2012
AUSTRALIAN
SECURITISATION
JOURNAL
ASF MANAGEMENT
COMMITTEE
Chairman
Tim Hughes
Deputy Chairman
Patrick Tuttle
Treasurer
Chris Green
Chief Executive Officer
Chris Dalton
Chief Operating Officer
Alex Sell
asf@securitisation.com.au
+61 2 8243 3900
www.securitisation.com.au
www.kanganews.com
+61 2 8256 5555
Managing Director
Samantha Swiss
sswiss@kanganews.com
Editor
Laurence Davison
ldavison@kanganews.com
Staff Writer
Chelsea Wallis
cwallis@kanganews.com
Contributing Editor
Kimberley Gaskin
kgaskin@kanganews.com
Project Manager
Brydie Wright
bwright@kanganews.com
Subscriptions Manager
Jennie Wright
jwright@kanganews.com
Design Consultants
Hobra Design
www.hobradesign.com
Depsito Legal: B-36961-2011
Printed in Spain by CEVAGRAF, SCCL
ISSN
1839-9886
ASF 2012 EXCEPT ISSUER PROFILES
SECTION ( KANGANEWS). REPRODUCTION
OF THE CONTENTS OF THIS MAGAZINE IN ANY
FORM IS PROHIBITED WITHOUT THE PRIOR
CONSENT OF THE COPYRIGHT HOLDER.
FOREWORD
2 Australian Securitisation Journal | Issue 02_2012
I
ts really great to once again have the opportunity to introduce the semi-annual industry
journal published by the Australian Securitisation Forum (ASF). The first edition was packed
with informative articles and perspectives from across the industry an interesting and
enlightening read.
It has certainly been a turbulent ride for the industry since I wrote my foreword to
the previous Australian Securitisation Journal in September 2011. The inaugural issuance of
Australian covered bonds, the clarification of liquidity rules for banks and daily developments
in precarious European financial markets have marked a very interesting period.
International financial markets are still behaving cautiously in many respects, but Australia has
continued to fare reasonably well, in part due to the critical passage of our covered bonds legislation.
With the world reeling from credit rating downgrades, austerity packages and perilous financial markets,
covered bonds have been vital in opening a new, more reliable window for Australian lenders to diversify
their funding sources, at lower cost and for longer maturities.
Since the passage of legislation, over A$28 billion (equivalent) of covered bonds has been issued by
Australian banks in six denominations. With the largest Australian banks paving the way, opening the
market and establishing a template for
future issuance, I am looking forward
to some competitors to the major banks
taking advantage of this new funding
source.
As for our securitisation market, there
was a flurry of activity in late 2011 during
which pricing noticeably deteriorated
as investors kept one eye firmly on
international market developments.
Following the Christmas break, with
covered bond issuance jumping to life, Australian securitisation markets remained subdued. It has been
encouraging to see residential mortgage-backed securities (RMBS) issuance resume. In particular, it is
great to see the industry using innovative structures to attract new investor demand offshore. Whether
this development proves to be a more permanent feature of our market, only time will tell. But it does
demonstrate the importance of innovation for the industrys future.
I am proud of the government support for RMBS issuance, which preserved the markets superstructure
during the most profound dislocation in global markets in generations, and has continued to support new
issuance so smaller lenders can keep competing.
I am also confident that the industry is well placed to face the future we have sound public finances
with very low debt, solid growth, low unemployment and, as I continue to enjoy telling my international
counterparts, no Australian prime RMBS has ever defaulted.
Thanks again to Chris Dalton and his colleagues at the ASF, and I hope you enjoy this edition of the
Australian Securitisation Journal.
CANBERRA, APRIL 27 2012
THE HON. WAYNE SWAN MP
DEPUTY PRIME MINISTER AND TREASURER OF AUSTRALIA
With the largest Australian banks paving
the way, opening the covered bond market
and establishing a template for future
issuance, I am looking forward to some
competitors to the major banks taking
advantage of this new funding source.
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(Commonwealth Bank) is incorporated in Australia with limited liability. CLA1549
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Call your Relationship Executive or visit
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Acquisition of GE Capitals Residential
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Super Members Home Loans Series
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IDOL Trust Series 2011-2
Prime Residential Mortgage Backed Securities
A$750 Million
Joint Lead Manager
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FLEXI ABS Trust 2011-1
Consumer Asset Backed Securities
A$133 Million
Arranger and Sole Lead Manager
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ASF
WELCOME
4 Australian Securitisation Journal | Issue 02_2012
A
fter more than three years in the role of chairman of the Australian Securitisation
Forum (ASF) we bid farewell to Stuart Fuller, who has stepped down from the ASFs
National Committee due to the demands of his new role as global managing partner
of King & Wood Mallesons. The National Committee expressed its deep gratitude for
Stuarts contribution and leadership of the ASF since 2009. We wish him luck in his
new and exciting Hong Kong-based role.
We are pleased to welcome Tim Hughes, treasurer of Suncorp Bank, as the new ASF
chairman (see Q&A on p10). Tim joined the National Committee in 2010 and his treasury responsibilities
at Australias largest regional bank, including experience in funding through securitisation and possibly
in the future through covered bonds, makes him an ideal person to lead the ASF. Patrick Tuttle, chief
executive officer of Pepper Australia, continues as a deputy chairman and a second deputy chairman will
be appointed in mid-2012 by the National Committee.
The ASF also congratulates Greg Medcraft, ASIC chairman, on his appointment as chairman of the
International Organization of Securities Commissions (IOSCO). The ASF considers Greg to be an ideal
candidate for this role given his international experience and leading role in IOSCOs Task Force on
Unregulated Markets and Products. The ASF is committed to work with bodies such as IOSCO to rebuild
securitisation markets by improving disclosure and other market practices.
In this edition of the ASJ we profile the activity in Australias emerging covered bond market, which
opened in late 2011 following the passing of legislation to facilitate such issuance by Australian banks.
Despite volatile market conditions, numerous issues of covered bonds have been made by the four major
Australian banks, denominated in a variety of currencies. One of the objectives of the ASF in 2012 will
be to work with the industry to develop a reporting and disclosure standard for issuers of Australian
covered bonds. This will build on the disclosure and reporting standards already established for Australian
residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) collateral pools.
Australias securitisation market has had a slower-than-usual start in 2012, partly as a result of the
focus of the four major banks on establishing their covered bond programmes. Nonetheless, a variety of
mortgage- and asset-backed issues have been completed to date including auto loans, prime residential
and non-conforming mortgages. The latest RMBS by ME Bank included an innovative US dollar tranche,
which is an encouraging sign that demand exists among US investors for high-quality Australian RMBS.
A key body of work to be championed by the ASF in the second and third quarters of 2012 will be
to garner industry input to contribute to the development of a new prudential standard (APS120) to be
drafted by the Australian Prudential Regulation Authority (APRA) in 2012. The ASF commends APRA for
undertaking a comprehensive reconsideration of the standard given the development of the market and
the impact of the 2008 financial crisis. We are keen to contribute to assist the development of a clear
principle-based standard which will apply to securitisation by Australian financial institutions.
The introduction of covered bonds and the continued diversity of ABS and RMBS are promising
developments for Australias debt capital market and global investors looking for exposure to the
Australian economy.
I hope you find this second edition informative and look forward to seeing you at the 2012 ASF annual
conference at the Hilton Sydney on 22 and 23 October 2012.
WELCOME TO THE SECOND
EDITION OF THE ASJ
CHRIS DALTON
CEO, AUSTRALIAN SECURITISATION FORUM
22&23 OCTOBER 2012, HILTON HOTEL, SYDNEY
AUSTRALIAN SECURITISATION
FORUMS ANNUAL CONFERENCE
For more information and registration details please go to
www.securitisation.com.au/asf2012
6 Australian Securitisation Journal | Issue 02_2012
ANALYSIS
ASF NEWS
AND INSIGHTS:
Structured finance
market dynamics
Keeping an eye on changing market
conditions and the developing regulatory
environment has kept the Australian
Securitisation Forum (ASF) the
industrys peak body busy engaging
with all market participants, from
government though to issuers and
investors.
S
ince the inaugural edition of the Australian
Securitisation Journal (ASJ) in 2011, we have seen a
flurry of covered bond issuance by the four largest
Australian banks, into a number of currencies
and sold to a range of investor types (see charts on
this page and facing page). This issuance, something the ASF
advocated for over almost a decade and by March 7 totalled
A$28 billion (US$27.9 billion) equivalent, was great to witness.
We are also poised to see other Australian banks follow the
majors down this path. The development of this market has
been fantastic to see, particularly given the cost and access
issues associated with senior unsecured and residential
mortgage-backed securities (RMBS) markets in Europe.
But the introduction of covered bonds has changed RMBS
demand characteristics. The spreads at which some of the
covered bond deals priced pushed out RMBS curves to levels
that made it uneconomic for many issuers that were otherwise
ready to go to market, as shown in the chart on p7 by the hiatus
in RMBS issuance between December 2011 and February 2012.
In April 2012 we witnessed A$1.75 billion in RMBS issuance
by two large retail banks, ING Bank (Australia) and ME Bank.
This has resuscitated confidence among other RMBS issuers
that deals can be done and that investor indigestion created by
consecutive domestic jumbo covered bond deals has ended.
In discussions with Australian domestic fixed income
investors, we are told that many bought the inaugural local
covered bond deals because of the coupon generosity of the
issuers. Before those inaugural deals came to market, however,
many domestic investors said they would not buy because they
could not see relative value to senior unsecured and RMBS.
Indeed, many of those investors have sold down their holdings
to lock in attractive annualised returns given the tightening in
secondary market spreads.
To summarise, then, we hope that the volume and pricing
effects of covered bond deals in the local market will find a
natural level and permit the market for RMBS to return to the
levels to which we became accustomed in 2011.
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
AUSTRALIAN COVERED BOND ISSUERS
7
6
5
4
3
2
1
0
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
ANZ NAB CBA WESTPAC
Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12
7
What ongoing global volatility has also taught us is that the
governments programme of being a cornerstone investor in
RMBS remains crucial it gives certainty to issuers, confidence
among private sector investors and liquidity to the market.
Indeed, the governments agency charged with managing the
programme the Australian Office of Financial Management
Co-chaired by Vernon Spencer
and Robert Camilleri, this active
sub-committee seeks to initiate
and respond to matters that
seek to enhance the operational
effectiveness of our market, and
its standing globally. This year,
following developments in RMBS
market standards and practices
in 2011, the ASF has launched
its ABS Disclosure & Reporting
standards. Particular thanks on this
project go to ANZ Banking Groups
Gary Sly and Resimacs Belinda
Smith. Next off the blocks is the
ASF Covered Bond Disclosure &
Reporting Standard, which will be
led by National Australia Banks
Eva Zileli.
We continue to have close
dialogue with regulators in relation
to these standards insofar as our
progress on bedding down the
standards in the local market is
concerned, as they are seen as
key to investor confidence and
financial stability.
Market standards & practices
(AOFM) actually sold a small parcel of its RMBS holdings in
March 2012 to support price discovery in the broader market.
We are, however, very alert to the risks posed by the
political changes afoot in Europe, most recently in the form
of French and Greek voters opposition to austerity measures
agreed and the fiscal stability pact entered into by their past
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
COVERED BOND CURRENCIES
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
AUD EUR NOK USD CHF GBP
Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
RECENT SECURITISED ISSUANCE
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
RMBS CMBS ABS Small-ticket CMBS
Dec 10 Mar 11 Jun 12 Sep 11 Dec 11 Mar 12
Other initiatives underway include:
Bondholder communications
in order to facilitate reliable and
predictable information flow between
issuers, trustees and end investors
and their custodians. The Australian
Securities Exchange (ASX) and the
ASF are in discussions on how this
might be operationalised, and the
costs involved. The motivation for
this rests with difficulties experienced
by issuers and trustees in identifying
end investors whenever noteholder
consents are required. Having an ASX
ticker for individual RMBS and ABS
series may also permit other benefits
such as a single reference point to
access monthly reporting and perhaps
in due course price quotations.
Synthetic RMBS Reference Curve.
Led by Robert Camilleri, ASF board
member and managing partner
of Realm Investment House, this
initiative seeks to alleviate two related
Achilles heels in our RMBS product
price discovery and liquidity such
that we cast an archetypical collateral
pool backing an archetypical A1 AAA
tranche of RMBS (for both bank
and non-bank issues, respectively)
in order to solicit bid/offer spreads
from buy- and sell-side market
participants on a quarterly basis. The
process is likely to be akin to the
non-synthetic methodology adopted
by the Australian Financial Markets
Association for its administration of
the bank bill swap rate.
For bank issuers of RMBS,
considerable interest is being paid
to the clean slate to which the
Australian Prudential Regulation
Authority (APRA) has committed in
terms of its prudential approach to
bank securitisation. The ASF has a
cross-section of Australian issuers
as well as legal and accounting
experts to ensure that we can fully
support APRA in its endeavours to
deliver a prudential standard that
better reflects the realities of todays
securitisation landscape.
8 Australian Securitisation Journal | Issue 02_2012
ANALYSIS
and Treasurer (whom we thank again for the governments
support of the industry and his opening remarks in this
edition of ASJ), Assistant Treasurer, the Australian Treasury
and AOFM in Canberra, the RBA, our market regulators the
Australian Securities and Investments Commission and the
Australian Prudential Regulation Authority state revenue
offices (particularly Queensland and South Australia), and
others. At a parliamentary level too we have remained
engaged, backgrounding the coalition Treasury team and key
backbenchers on market and policy matters.
In 2012 we lodged submissions to the Securities Exchange
Commission, the International Organization of Securities
Commissions and others in a bid to both promote and protect
our market, largely by making the case to revise or exempt
Australia from unwanted and in some cases unintended
negative consequences. We will be monitoring amendments
to the rule-making arising from the Dodd-Frank Act and
the Volcker Rule. In Europe, in due course, we would like to
continue to advocate having Australian collateral accepted at
the European Central Bank and Bank of England.
We will be maintaining the high level of our resource
allocation to these initiatives in order to remain trusted,
providing counsel that is genuinely useful to our stakeholders
and our market.
Our new chairman, Tim Hughes, has touched on offshore
investor opportunities in his Q&A published in this issue
of ASJ (see p10). We solicit issuer and arranger member
feedback on these costly initiatives. Given the importance of
offshore investors, we will continue to promote Australian
securitisation and covered bonds in new markets such as Japan
and Taiwan, and maintain dialogue with longstanding but
presently not especially deep markets for Australian RMBS
and ABS, such as Europe and Asia. It is especially in that latter
camp, south- and north-east Asia, where we see scope for AUD,
USD and JPY accounts to find value for issuers and investors
alike given the painfully high cross-currency basis swap costs
between AUD/EUR and AUD/GBP.
At recent meetings in Melbourne and Sydney, the
ASFs Fixed Income Investor Forum sought feedback
on a number of the initiatives in the areas under
discussion at the ASF in terms of market standards
and practices (see box on p7). We are delighted to
have such a vibrant local investor market and very
much welcome their contribution to ensure that the
outcomes of our work reflect the realities of both the
buy and sell sides of the structured credit market.
Offshore, we will be resuming our global investor
outreach with various sessions in London, Tokyo and
Singapore. Again, just as with Australian fixed income
investors, we see it as key to understand these
investors preferences and expectations so we can
ensure a sustainable awareness and a reputation as a
reliable partner that is visible and responsive.
Investor engagement
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012 SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
RMBS OUTSTANDING BY MAIN ISSUANCE CURRENCIES AUSTRALIAN RMBS ISSUANCE BY MAIN ISSUANCE CURRENCY
200
175
150
125
100
75
50
25
0
70
60
50
40
30
20
10
0
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
AUD AUD EUR EUR USD USD GBP GBP
Dec 95
1
9
9
4
2
0
0
2
1
9
9
8
2
0
0
6
1
9
9
6
2
0
0
4
2
0
0
0
2
0
0
8
2
0
1
1
1
9
9
5
2
0
0
3
1
9
9
9
2
0
0
7
2
0
1
0
1
9
9
7
2
0
0
5
2
0
0
1
2
0
0
9
2
0
1
2
Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11
leaders. The UK has also reported another recession, which we
hope will not be long-lived, but given deep unemployment and
sluggish growth among its neighbours this is far from assured.
What this all means indirectly for Australian RMBS, asset-
backed securities (ABS) and covered bond investor sentiment
remains to be seen, but we predict it will cause ongoing
nervousness. Thankfully, our economy remains robust albeit
with slowing growth to levels more in keeping with the
Reserve Bank of Australia (RBA)s central inflation target. This
should relax the strength of the Australian dollar albeit beside
a trend of ongoing weakening of the euro.
ENGAGEMENT WITH GOVERNMENT
Ever since the brutal effects of the 2008 financial crisis, the
ASF has recognised the importance of relationships with
policymakers. This includes The Deputy Prime Minister
9
Notwithstanding the Australian markets desire to
see much greater offshore participation, we now see from
outstandings that in that paradigm to date the market has
found a natural depth of around A$75 billion. The recent
US$300 million A1 bullet 2a-7 money market tranche from ME
Banks SMHL 2012-1 proved very successful for both the buy-
and sell-side and, accordingly, arrangers are looking closely at
harvesting further opportunities in the US.
We would also like to take this opportunity to thank
our education partner, the Australian Financial Markets
Association, which provides ASF with the necessary marketing,
editorial and administrative scale to support our courses.
Finally, in terms of new horizons, the chairman has
touched on the online module initiative that will enable us
to deploy our Securitisation Fundamentals course in markets
that previously either for reasons of cost or distance have
been unable to get access to our entry-level course. We are
also delighted to be taking our education syllabus across the
Tasman to our colleagues in New Zealand. This includes ASF
Securitisation Fundamentals, ASF Covered Bonds Workshop
and, we predict, our Diploma in Securitisation.
Forthcoming course dates can be found on the inside back
cover of this magazine.
A less conspicuous but by no means junior mission
for the ASF is its education and training offering.
Since November 2011 the ASF has delivered six
covered bond courses in Sydney, Brisbane and
Canberra, equating to approximately 100 market
professionals receiving contemporary content and
teaching. Leading practitioners from their respective
fields have devoted huge amounts of their firms time
to producing the content for not just covered bonds
but also for our new advanced-level course, Applied
Securitisation. The new course is now available online
for participants to book.
While there is an Applied Programme that permits
industry practitioners to follow a pathway that
mandates our core module (comprising Securitisation,
Cash Flow and Waterfall Modelling) plus two
electives, we also recognise that some will just
want to take up a module applicable to their day-to-
day role supporting securitisation products within
their business. To help facilitate this, we have taken
the decision to make the Contemporary Legal &
Regulatory Developments, Advanced Accounting
& Tax Issues, Principles of Credit Analysis and
Transaction Governance modules available on an la
carte basis.
We would like to acknowledge the contribution of
numerous ASF members and firms in this enterprise,
which we know is a great benefit to the whole
industry benefits and is doubtless one of the reasons
we are one of the few countries to still have an
enduring product.
Education mission
FOR FURTHER INFORMATION PLEASE CONTACT:
Contributors include:
Core Module Structuring, Cash Flow
and Waterfall Modelling
Robert Camilleri, REALM INVESTMENT HOUSE
David Chisholm, MRGIJ HOLDINGS
Steve Magan, J.P.MORGAN
Advanced Accounting & Tax Issues
Heather Baister, DELOITTE
Richard Balfour, ERNST & YOUNG
Phil Lee, DELOITTE
Graham Mott, DELOITTE
Debbie Hankey, DELOITTE
Tung Dao, ERNST & YOUNG
Contemporary Legal & Regulatory Developments
Sonia Goumenis, ALLEN & OVERY
Karolina Popic, ALLEN & OVERY
Trustee Role, Responsibilities & Relationships
Glenn White, AUSTRALIAN EXECUTOR TRUSTEES
Angelo Kalafatas, PERPETUAL
Mark Dickenson, PERPETUAL
Magnus Wilson-Webb, BNY MELLON AUSTRALIA
Jim Brooks, BNY MELLON AUSTRALIA
Tessa Hoser, NORTON ROSE AUSTRALIA
Principles of Credit Analysis
Robert Camilleri, REALM INVESTMENT HOUSE
David Chisholm, MRGIJ HOLDINGS
Steve Magan, J.P.MORGAN
Hayden Went, COMMONWEALTH BANK OF AUSTRALIA
Justin Mineeff, COMMONWEALTH BANK OF AUSTRALIA
Alex Sell
Chief Operating Officer
+ 61 2 8243 3900
asell@securitisation.com.au
10 Australian Securitisation Journal | Issue 02_2012
Q+A
W
hat key dynamics
are affecting
the Australian
securitisation
market?
The year has started
slowly in terms of primary issuance. A key
contributor to that continues to be the
difficulty in offshore markets. The large
investor base that existed prior to the
financial crisis is no longer there.
The domestic securitisation market
has proven to be resilient and robust.
But our key challenges are how we can
attract offshore investment back into
our market and how we grow domestic
investor involvement. We have a certain
degree of reliance on offshore markets,
so we are working hard to uncover new
opportunities that work for both issuers
and investors.
Another key issue is how the
Australian market develops an
exit strategy from its reliance on
the Australian Office of Financial
Management (AOFM) buying
programme. The programme is
reducing in terms of how much the
AOFM has to invest and we are equally
keen to see the market stand on its own
two feet. But the industry will need to
come together to facilitate a transition.
How can Australian issuers engage
more with offshore investors?
We expect to see more engagement
going forward as issuers tailor tranches
attractive to both domestic and offshore
investors, such as we saw with the recent
ME Bank transaction. This deal included
a one-year bullet maturity supported by a
redemption facility provided by National
Australia Bank (NAB), under which NAB
guaranteed to underwrite any potential
shortfall in the tranches redemption
fund at maturity date.
We see potential for more investor
demand out of the US in particular, and
the ASF is doing some work alongside
issuers to cultivate this buying base.
Although smaller issuers and domestic
issuers still have the problem of the basis
swap to contend with, we anticipate
more activity with US investors going
forward.
There is also some real momentum
in parts of Asia, particularly Japan and
Taiwan, where investors are looking
for yield and longer-dated secured
investments. These investors are
comfortable with Australian risk and
are gaining more understanding of
residential mortgage-backed securities
(RMBS) product and structures.
Real-money investors are less
prominent in the RMBS market
right now. What will reignite their
appetite?
There is still a core investor base that is
comfortable with RMBS, but there may
be some benefit in introducing a master
trust structure to take out the pre-
payment risk and offer a bullet structure
to fixed income investors.
We are currently working on
recommendations around redrafting
local regulation which will look to
establish and include master trusts. This
will be important for both domestic and
offshore investors.
What are the ASFs key priorities
for 2012?
We are looking to build on successes
in the disclosure and reporting space,
As the Australian structured finance market continues to
change in response to new opportunities and old challenges,
the objectives of the Australian Securitisation Forum (ASF)
are developing and expanding. The ASFs incoming chairman,
Tim Hughes, discusses how the ASF is responding to
developing environment.
focus on prudential regulation reform,
promote and build our industry
reputation in domestic and overseas
markets, and ensure that the industry
can become self-sustainable in the
medium to long term. We will also
continue to focus on our successful
education programmes, which have
been instrumental in expanding the
knowledge and expertise in our industry.
How is the ASF engaging with
government and regulators?
Liaison with government and regulators
is extremely important to the ASF.
We have most recently been heavily
involved in dialogue with the Australian
Prudential Regulation Authority (APRA)
about APS120. We have been able to
discuss the issues for borrowers that are
seeking clarity around whether they
should execute funding transactions
or full capital relief transactions and
resolving the uncertainty around the
sell-down of subordinated tranches. The
regulator has welcomed our feedback and
will be considering our recommendations
as it comes to redraft APS120.
We are maintaining strong
relationships and open dialogue with
the federal government, engaging with
both sides of the political spectrum, the
department of Treasury, and the AOFM
around developments in our industry.
The ASFs education mission is
critical to the development of the
Australian market. How is the
programme progressing?
We have developed a fantastic
programme that is very well supported
by all sides of industry. Our focus
is to make sure the programme is
current and relevant. We have already
introduced a covered bond programme,
for example, and we will continue
to offer education resources that
illuminate the secured market. We
are also focused on the delivery of our
resources and we are looking into online
applications for our courses.
TIM HUGHES
CHAIRMAN, AUSTRALIAN SECURITISATION FORUM
11 11
WHY STANDARD &
POORS CLASSIFIES
AUSTRALIAN COVERED
BOND PROGRAMMES
ALONGSIDE CANADA
AND MUCH OF EUROPE
S
tandard & Poors Ratings Services (S&P) recently
published its approach to rating covered bonds
in Australia, where a combination of market
conditions and new laws has encouraged major
banks to quickly adopt this alternative funding tool
over the past six months.
Vera Chaplin, structured finance regional practice
leader for Asia Pacific, answers some key questions on the
rating agencys assumptions for classifying covered bond
programmes in Australia, including why the country is ranked
alongside Canada and much of Europe. She also explains why
uptake of the new asset class has been strong in Australia and
why she expects interest in covered bonds to stretch into new
territories across the Asia Pacific region.
IN APRIL 2012, S&P DETAILED ITS RATINGS
ASSUMPTIONS FOR AUSTRALIAN COVERED BONDS
FOR THE FIRST TIME, PLACING THE COUNTRY IN THE
CATEGORY 2 GROUP. WHAT DOES THIS MEAN?
Under the S&P global criteria for assessing asset-liability risk
in covered bond programmes, we segment these programmes
into three distinct categories that consider primarily the
jurisdiction of a programme and its ability to access external
financing or monetise the cover pool. These categories, along
with the asset-liability mismatches (ALMM) percentage,
determine a programmes maximum potential rating uplift
over the rating on the issuer.
The potential ratings uplift ranges for Category 1, 2, and
3 programmes is five to seven, four to six, and three to five
notches, respectively. For each category, maximum ratings
may be achieved within the range, dependent on the extent of
the ALMM exposure. In short, the lower the ALMM exposure,
the higher the rating uplift that may be achieved within the
range in each of the three categories.
S&P has placed Australia in Category 2. This means
Australian covered bond programmes are assessed at the
same level as Canada and most European countries, including
covered bonds issued by Finland, France (structured covered
bonds), Ireland, Italy, Luxembourg, the Netherlands, Norway,
Portugal, and the UK (see table on p13).
Under Category 2, the maximum potential rating that can
be achieved by an issuer is between four and six notches above
the rating on the issuer. For example, an issuer rated A can
issue a AAA-rated covered bond if all other risks are addressed.
Given that the maximum achievable rating is capped at AAA,
it is possible that highly-rated issues may retain some unused
uplift, which may create a certain amount of rating stability if
the rating on the issuer were lowered.
WHY ARE AUSTRALIAN COVERED BOND
PROGRAMMES NOT PLACED IN CATEGORY 1?
The Australian covered bond market has a limited history
compared with many well-established markets in Europe,
which also benefit from more diverse funding options. As
a result, countries such as Denmark, France (obligations
foncires), Spain and Germany sit in Category 1.
S&P HAS ALSO CLARIFIED THE TARGET ASSET
SPREADS FOR AUSTRALIAN PRIME RESIDENTIAL
MORTGAGE LOANS, PLACING THESE LOANS IN
BUCKET 1. CAN YOU PROVIDE DETAILS ON THIS
CLASSIFICATION?
Under our global criteria, we group the cover pool assets in
jurisdictions into one of three buckets and assign a target
asset spread for each bucket for the purpose of market-value
assessment in the event the underlying cover pool needs to
be monetised.
The Bucket 1 classification means that if the Australian
residential-loan cover pool at exposure (as estimated under
our ALMM assessment) needs to be liquidated to repay
covered bonds outstanding, we would apply a discount rate
of a target spread of 425 basis points over the benchmark rate
to calculate the present value of the projected cash flow from
the collateral pool.
CO-PUBLISHED
FEATURE
12 Australian Securitisation Journal | Issue 02_2012
CO-PUBLISHED
FEATURE
This target asset spread reflects a shock spread, which
is derived from analysis of a number of external sources
combined with S&Ps own analytical opinion on the suitability
and relevance of this data. Also, comparisons are made to
similar products in other markets.
We analysed the secondary market trading margins of
Australian AAA-rated prime residential mortgage-backed
securities (RMBS) as a proxy for residential mortgage loan
sales in Australia. We have included only prime RMBS in our
analysis, as this is in line with the eligibility requirement to be
included as cover pool assets. We also considered the extent
offshore markets affect Australia, given it has a level of reliance
on offshore funding. While Australian RMBS have performed
well to date from a credit perspective, the Australian funding
market tends to be influenced by key global capital markets.
As such, and in line with the key global markets, we assigned
Australian prime residential mortgage loans to Bucket 1 with
respect to target asset spread.
S&PS RATINGS METHODOLOGY FOR COVERED BONDS
LOOKS SPECIFICALLY AT FIVE KEY AREAS, BUT THERE
SEEMS TO BE A STRONG FOCUS ON ALMM RISK. WHY
IS THIS SO?
First, it is important to stress that all five key areas of S&Ps
ratings analysis for covered bonds are important. These
include legal risk, operational and administrative risk,
counterparty risk, asset risk, and cash flow risk, which
includes ALMM risk assessment.
The reason the ALMM risk is important is that covered
bonds tend to have bullet maturities that may create asset-
liability mismatch risk, and there are diverse opinions on
the importance of this risk. From our perspective, where
there is an ALMM risk exposure, the covered bond ratings
will be weak-linked to the ratings of the financial institutions
that issue them. We start with the scenario of insolvency of
the covered bond issuer, because the covered bond ratings
are typically elevated above the issuer rating and we need
to look to the cover pool cash flows for rating elevation
above the issuer rating. We then assess whether there may
be substantial recovery from the cover pool to meet the
outstanding covered bonds in conjunction with available
mitigating factors for the ALMM risk.
SUMMARY OF STANDARD & POORS REVISED CRITERIA FOR ASSESSING ASSET-LIABILITY MISMATCH RISK IN COVERED BONDS
Five key areas of Standard & Poors covered bond ratings analysis
See relevant criteria
Standard & Poors 2009
Asset risk
STEP 1:
ALMM classification =
=
=
=
=
Zero
Low
Moderate
High
STEP 2:
Programme categorisation
Category 1 Category 2 Category 3
STEP 5:
The covered bond rating
Compare target credit
enhancement with available
credit enhancement
STEP 3:
The maximum potential
covered bond rating
Determine target credit
enhancement to achieve maximum
potential ratings uplift
Max
potential
rating uplift
(notches)
STEP 4:
Cash flow and
market value analysis
CATEGORY
ALMM risk 1 2 3
Zero Unrestricted
Low 7 6 5
Moderate 6 5 4
High 5 4 3
Cash flow risk Legal risk
Operational and
administrative risk
Counterparty risk
13
The overcollateralisation sizing is less sensitive to the
rating on the issuer or the rating migration because of the
assumption of issuer insolvency at the outset. Our recent study
Most Covered Bond Ratings Hold Steady As Issuer Ratings Fall found
that over the six months to April 2012, almost 40 per cent of
our ratings on institutions that issued covered bonds were
lowered. However, only 16 per cent of covered bond ratings
were lowered over the same period and 91 per cent of covered
bond ratings remain in the AAA/AA rating categories.
IN S&PS VIEW, WHY HAVE AUSTRALIAS BIG
FOUR MAJOR BANKS BEEN QUICK TO TAKE UP THE
OPPORTUNITY TO ISSUE COVERED BONDS, BOTH IN
AUSTRALIA AND OFFSHORE?
Although covered bonds have a very long history in some
European jurisdictions, Australian banks were prohibited from
issuing them until the Australian legislative framework for
covered bonds came into effect in October 2011.
In a short space of time, however, covered bonds have
emerged as an additional part of the funding mix for the
major banks, with issuer and investor sentiment toward
this funding tool now very favourable. Each of Australias
four major banks which remain materially dependent
on wholesale funding have established covered bond
programmes and by April 18 together they had issued more
than A$22 billion (US$21.9 billion).
Apart from the legislative changes, the flurry of covered
bond issuance in Australia has coincided with the adverse
market conditions in funding markets worldwide, especially
STANDARD & POORS COVERED BOND PROGRAMME CATEGORISATION
Category 1 Category 2 Category 3
Range of funding
options
A programme has the flexibility to raise
funds through BOTH asset sales AND
borrowing from either banks or the central
bank. There are no restrictions on when or
how funds can be raised.
A programme is able to raise funds EITHER
through asset sales OR borrowing from
either banks or the central bank. There are
no restrictions on when or how funds can
be raised.
A programmes access to funding is
RESTRICTED so the sale of assets is forced.
Strength of funding
sources
The covered bond market has, in our
opinion, a long and WELL-ESTABLISHED
history. In our view, systemic importance
of the product is HIGH. We consider if
there is a broad range of banks that are
able to lend. We evaluate if there would
be adequate demand among a broad range
of investors for the assets backing the
programme.
The covered bond market has, in our
opinion, a LIMITED history. In our view,
systemic importance is not as strong as
Category 1. We consider if there is a
broad range of banks that are able to lend.
We evaluate if there would be adequate
demand among a broad range of investors
for the assets backing the programme.
The covered bond product is NEWLY
ESTABLISHED in that jurisdiction. In our
view, systemic importance is LOW. We
consider if banks are unable to lend to
programmes. We evaluate if there is
uncertain demand among a broad range
of investors for the assets backing the
programme.
Jurisdictions Denmark, France (obligations foncires),
Germany, Spain, Sweden
Australia, Canada, Finland, France
(structured covered bonds), Ireland, Italy,
Luxembourg, The Netherlands, Norway,
Portugal, UK
Greece, US
Maximum potential
number of notches
uplift from the ICR
5 - 7 4 - 6 3 - 5
SOURCE: STANDARD & POORS
in Europe, as well as banks growing preference for secured
funding. Financial market dislocation and continued
instability have heightened the importance of diversification
of the investor base of Australias major banks, and it is clear
that Australian banks believe covered bonds play a part in
serving this purpose.
IS INVESTOR DEMAND FOR COVERED BONDS LIKELY
TO SPREAD ACROSS THE REST OF THE ASIA PACIFIC
REGION?
Anecdotal evidence suggests that issuer and investor interest
in covered bonds is growing strongly across the Asia Pacific
region, although so far actual covered bond transactions
have been largely from banks based in Australia, New
Zealand and Korea.
However, we note that some policymakers in the region
are preparing to introduce new legislative- or rules-based
frameworks for covered bonds. For example, the Reserve Bank
of New Zealand and the Monetary Authority of Singapore have
released consultation documents on the subject.
Although Asia Pacific jurisdictions have taken a legislative
light approach to covered bond regimes, we believe
legislation creates confidence for investors and issuers on how
stakeholders, such as regulators, will treat covered bonds. In
some Asia Pacific jurisdictions, another key challenge relates to
the assessment of ALMM risks, particularly in countries where
there is limited secondary market information available. In
S&Ps analysis, we look to assess other mitigating factors for
ALMM risk.
16 Australian Securitisation Journal | Issue 02_2012
CO-PUBLISHED
FEATURE
PRUDENT MORTGAGE
LENDING STANDARDS
HELP FINANCIAL
STABILITY: LESSONS
FROM THE US
M
any observers look at the US housing meltdown
and wonder whether it could happen in
other countries. For a number of reasons, that
would be unlikely. The US has some unique
characteristics that enabled the meltdown.
In most countries, increased mortgage distress occurs with
economic downturns. That has been the experience of Ireland
and Spain, for example. Mortgage distress does not normally
precipitate a crisis, so why was the US experience so different?
The reasons are complex, but they can be boiled down to
lax lending practices. Lending standards eased in the US far
beyond what was seen in other countries. And they eased in
a way that exacerbated the tendency of mortgage borrowers
to default in a bust. The system of financial regulation did
not stop this easing: there were gaps in both prudential and
Luci Ellis, head of the financial stability
department at the Reserve Bank of
Australia (RBA) in Sydney, investigates
the US housing meltdown, highlighting
the unique set of circumstances that led
to a crisis. In doing so, she points out
why mortgage distress would be unlikely
to precipitate a crisis in countries like
Australia, which do not have the same lax
lending practices that existed in the US.
consumer protection regulation. Even where regulation
applied, it did not prevent lending practices not seen
elsewhere, especially around income documentation and
amortisation and not just in sub-prime.
DANGEROUS ASSUMPTIONS
Sub-prime lending has long been a niche in US mortgage
finance. The established lenders understood that it was a risky
customer base: people with a history of missing payments on
other debt. Yet brokers and lenders did not verify incomes or
other financial obligations of sub-prime and other non-prime
borrowers. Instead, they focused more on collateral value. If
housing prices kept rising, lenders assumed, the borrower
could either refinance or sell, and everything would be fine.
Alongside lending standards at the point that the loan is
made, what happens during the life of the loan also matters a
great deal. Some recent research by economists at the Federal
Reserve suggests that it was not high proportions of sub-
prime loans that predicted which districts would have worse
outcomes for prices and loan defaults (Barlevy and Fisher
2010). Rather, it was the proportion of new lending that was
interest-only loans. These loans were not being paid down. In
some cases, the loan balance was increasing through cash-out
refinancing or explicit negative amortisation. Paying your
mortgage down before the bust is the most effective way of
avoiding getting into negative equity once housing prices start
to fall, so it is no wonder US households were more likely to get
into trouble.
LAX TAX, RE-DRAWS AND ELASTIC SUPPLY
It turns out that a range of tax and legal differences in the
US, as well as industry convention, created a system that
discouraged amortisation. For example, US owner-occupiers
mortgage interest is tax-deductible, which is not a feature of
the Australian or Canadian tax systems (Ellis 2010). In addition,
most US mortgages are fixed rate, and the variable-rate
mortgages that were on offer did not allow the borrower to
make pre-payments that can be redrawn later if needed. Such
redraw loans are common in Australia and have proven a
highly effective vehicle for precautionary savings.
This meant that in the US, loan-to-valuation ratios (LVRs)
that were high at origination stayed high well into the life
of the loan. American households are less likely to pay their
mortgages down ahead of schedule than Australians. And
trade-up buyers seem to have high LVRs in the US, which
doesnt appear to be the case in Australia. As a result, US
housing stock is far more leveraged than that in Australia.
Another unusual feature of the US system is that housing
supply is quite elastic, at least in enough parts of the country
to matter. The housing boom was a construction boom as
well as a price boom. As a result, by 2006 there was already a
substantial overhang of excess supply. The inherent stock-flow
interaction in the housing market means that construction
17
booms sow the seeds of their own destruction. Prices can
undershoot formerly sustainable levels.
The US mortgage market is also unusual in its reliance
on capital markets for funding. During the boom, on-balance
sheet mortgage lending was not seen as being a profitable
or attractive business for US banking institutions a stark
contrast to Australia and many other countries.
MAINTAINING STANDARDS
As the RBA has made clear many times before, one important
reason Australia did not go down the same road as the US is
that lending standards did not ease as much here. Even at its
peak, sub-prime lending was only ever a tiny fraction of the
total. Low-doc loans were also a small niche.
And we never saw in Australia the explosion of zero-deposit
loans or worse, the 125 per cent loans that were available in
the UK. In Australia in recent years, around two-thirds of new
mortgage borrowers from banks had an initial LVR below 80
per cent. If we look at the whole mortgage book, that fraction
is even higher.
A large part of the reason why lending standards did not
ease as much here is that prudential supervision is stricter.
Unlike in the US, in Australia most mortgage lending is done
by firms that are prudentially regulated. Also unlike the
US, there is only one prudential supervisor, the Australian
Prudential Regulation Authority (APRA). Australian lenders
cannot arbitrage differences in prudential treatment across
different regulators.
Some Australian mortgage lenders are not prudentially
supervised, though, so consumer protection standards around
credit are a vital part of the authorities defence against a
US-style outcome. These standards have been broadened in
Australia in recent years, and shifted to a national framework
administered by the Australian Securities and Investments
Commission. But the earlier state-based system still had the
three features most needed to avoid US-style problems: it was
nationally consistent, it covered all consumer borrowers, and
it covered all lenders consistently, regardless of whether or not
they were prudentially supervised.
Another important mainstay against a US-style outcome is
that many Australian households actually pay their mortgages
down, often quite quickly. Estimates vary, but it seems as
many as half of owner-occupiers with mortgages pay down
faster than the contract requires. This is a welcome feature of
the Australian market that is rarely seen overseas. The faster
they pay mortgages down, the less likely they are to end up in
negative equity; they have a head start if prices should fall.
The international regulatory community is highly aware
of the role of lax lending practices in the US meltdown. In
response, the Financial Stability Board (FSB) has released
some global principles for sound mortgage lending practices,
which all countries should follow. The FSB principles
recognise that lending standards are multidimensional.
The focus should not be on maximum LVRs at origination,
ignoring all other aspects of lending standards; capacity to
service the loan is far more important.
If lenders were to ease lending standards beyond the point
of prudence they would not be doing anyone any favours.
Their customers, the borrowers, would be overburdened by
their debts. The firms themselves would face difficulties if loan
defaults were to rise. And financial stability would be much
harder to maintain. I am pleased to say that I do not currently
see signs of widespread lax lending practices here in Australia.
Indeed, APRA has been consulting with the boards of the larger
banking institutions about their housing lending standards.
But there will be times good times, when everything seems
rosy when lenders will find it hard to maintain the necessary
prudence. While the regulators can take actions and central
bankers like me can warn of the risks, in the end we all have a
stake in maintaining financial stability.
American households are less likely to pay their mortgages
down ahead of schedule than Australians. And trade-up
buyers seem to have high LVRs in the US; that doesnt
appear to be true in Australia. As a result, the US housing
stock is far more leveraged than that in Australia.
Barlevy G and JDM Fisher (2010) Mortgage Choices and
Housing Speculation Federal Reserve Bank of Chicago Working
Paper WP-2010-12.
Ellis L (2010) The Housing Meltdown: Why did it Happen in the
United States? International Real Estate Review, 13(3), pp 351394.
This article comprises edited extracts of two of Dr Ellis recent
speeches: Prudent Mortgage Lending Standards Help
Ensure Financial Stability (address to the Australian Mortgage
Conference 2012, Sydney, 23 February 2012, http://www.rba.gov.
au/speeches/2012/sp-so-230212.html) and Moderators Opening
Remarks for Panel Discussion on Mortgage Finance (Federal
Reserve Bank of Atlanta 2012 Financial Markets Conference, 11 April
2012, http://www.rba.gov.au/speeches/2012/sp-so-110412.html).
18 Australian Securitisation Journal | Issue 02_2012
ROUNDTABLE
Buy-side
diversity
search spurs
US investor
engagement
US-BASED DEMAND
Davison In general terms how important is it for
the Australian securitisation industry to develop
offshore demand for its product especially from
the US?
LIPPA The harder the bullet, the lower the additional swap
cost. When you are talking about a controlled amortisation
or bullet structure created via a master trust that swap cost
reduction can be quite dramatic. For a cross-currency swap
provider who is able to price the extension risk of a swap that
attaches to a security with a scheduled but not hard-wired
amortisation profile, including soft bullets, the extent to which
they can rely on the defined schedule is the key variable in
pricing the swap.
Davison The deal ME
Bank did in April has a
US dollar-denominated
tranche with a bullet
maturity. What
advantages does the
master trust structure
have that make it more
appealing than a bullet
RMBS, or a covered
bond?
LIPPA In the last NAB RMBS deal in 2011 there was also a
US dollar tranche, with a two-year soft bullet maturity. That
carries an element of increased extension risk that master trust
issuance largely does not have. Again, it would add to investor
certainty and reduce swap costs.
1. The G20 commitment was: Securitisation sponsors or originators should retain a part of the risk of the underlying assets, thus encouraging them to act
prudently. This originated from a recommendation made by TFUMP in September 2009.
Together with the Commonwealth Treasury, the Reserve
Bank of Australia (RBA) and the Australian Prudential
Regulation Authority (APRA), the Australian Securities and
Investments Commission (ASIC) makes up the council of
regulators in Australia. Greg Tanzer, commissioner at ASIC,
outlines the commissions work in the securitisation sector.
SPOTLIGHT ON ASIC
32 Australian Securitisation Journal | Issue 02_2012
D
o you foresee
any progressive
developments in
the makeup of the
committed liquidity
facility (CLF) over
time or will the initial version of the
programme be maintained unless
and until external developments
make a change appropriate?
We have clearly established the eligible
collateral for the CLF, which includes
government bonds and paper from
supranationals and other foreign
governments, as well as debt and asset-
backed securities, including residential
mortgage-backed securities (RMBS),
issued by authorised deposit-taking
institutions (ADIs).
For the purposes of the CLF, the
RBA will also allow banks to present
certain related-party assets such as self-
securitised RMBS. There are a number of
reasons for this decision, but the primary
motivation is to reduce the systemic risk
of excessive cross-holdings of bank-issued
instruments. In terms of how much
internal RMBS can be used, that will be
the Australian Prudential Regulatory
Authority (APRA)s call. The information
is now all out there and banks will
negotiate their CLFs with APRA.
Regarding the development of the
CLF, the only scope for broadening
is if new products emerge. If new
instrument classes come along, in due
course they will be considered. Covered
bonds, for example, are eligible,
although APRA still needs to come to a
determination as to whether they are
level two assets, which will be done
when the asset class is a bit bigger.
Do you anticipate the CLF will
have any impact on the established
repo system?
No. Everything which is currently repo
eligible with us is included in the CLF.
With the birth of a new asset class coinciding with significant
regulatory change regarding the liquid assets Australias
banks can hold, the securitisation market is staring down the
barrel of significant change. Guy Debelle, assistant governor,
financial markets at the Reserve Bank of Australia (RBA),
discusses the advent of covered bonds and how securitisation
will slot into the funding mix for Australian banks in a
changed regulatory environment.
Given the ratings decline of
a number of signicant global
sovereigns, has any thought been
given to revising ratings standards
for repo eligibility in any asset
classes?
The impact of sovereign downgrades has
only been at the margin with regard to
repo-eligible assets: only a few names
have been affected. Consequently, we
dont see any need at this stage to change
our repo-eligibility criteria. We have just
reviewed this and we are comfortable
with our position. We arent going to
chase issuers down the rating scale.
What does the development of
the Australian covered bond market
mean for the bank funding mix for
regional and major institutions?
The relativities in pricing between
unsecured and covered bonds and RMBS
have been broadly maintained over the
last six months. They have moved up and
down together, so the market has a set
idea of where the relativities should lie.
I anticipate covered bonds will be
mostly used as an offshore funding
tool by eligible banks primarily
the majors as they tap a particular
niche of investors. RMBS will become
the primarily domestic securitisation
vehicle.
We anticipate that banks will not
issue covered bonds right up to the 8
per cent cap level they will leave some
buffer zone.
Covered bonds are contributing to
the funding mix by enabling issuers
to term out their funding. The covered
product is generally between five and
10 years in maturity while RMBS is
focused on three years, so the new asset
class provides a real opportunity for
maturity diversification.
In terms of the regional banks, they
are reasonably well positioned. We
may start to see covered bond issuance
from some of these issuers and they
will continue to use the securitisation
market. Last year the non-major banks
NAVIGATING REGULATION:
THE CENTRAL BANKS VIEW
Q+A
33
were able to execute two to three deals
each and they are on track to do the
same again this year. The size of the
recent ME Bank RMBS deal demonstrates
the appetite for these names.
Regional banks have the ability to
be opportunistic about their issuance
and we expect to see them do so. Many
second-tier RMBS issuers really ramped
up their deposit funding in 2011, so
they technically dont need to issue
senior unsecured. As a result, RMBS is
a tool they can use when they want to.
However, issuers without a balance sheet
as a source of funding are likely to face
some challenges.
To what extent will covered bonds
affect the overall cost of funding for
Australian banks?
Even if issuance reaches the absolute
regulatory cap of 8 per cent, covered
bonds wont be enough to make a
material difference to overall funding
costs. There are many other inputs
into the cost of funding that are more
significant. And any pricing gain
obtained from issuing covered bonds
is likely to be offset to some extent by a
demand from unsecured debt holders for
more compensation in the future. I see
the role of covered bonds as primarily
broadening the potential investor base
rather than a means of reducing overall
funding costs for banks.
How comfortable is the RBA
with the quality of the collateral
underlying RMBS?
We have to be mindful of arrears rates
on mortgages because it is collateral
we sometimes hold as part of our repo
facility. We monitor arrears through
our middle office and we have no
concerns around collateral at this stage.
Arrears rates have been going sideways
for some time now.
The major banks have done a lot
of work to maximise the component
of wholesale funding they raise in
AUD in recent years. Do you think
the RBA or other independent bodies
should provide incentives to guide
banks funding mix?
In terms of product selection, if not
the onshore-offshore currency split,
the liquidity coverage ratio and the
net stable funding ratio recommended
by Basel III provide incentives to term
out, for example. While denomination
of funding isnt a priority here,
these dynamics definitely affect the
composition of funding by incentivising
long-term funding and deposit funding.
But really a range of forces works to
shape funding composition, apart from
Basel III including pressure from the
market. So banks had already started
down this path prior to Basel III. With
all these forces working together, there
is no real need for any more official
incentives.
BRUNTON It could be, but the longer that stays the case the
more it puts a big question mark over liquidity. There are
also some unanswered regulatory questions around how
RMBS may be treated within banks liquid assets facilities
and I think that could be preventing answers to those
liquidity questions.
CASEY I think that is fair comment. Having said that, the bulk
of the money in RMBS deals at present comes from authorised
deposit-taking institution (ADI) investors. It is true that by
paying another 5 basis points we may have got a little bit more
and that by paying another 25 points we may have got an extra
10-20 per cent to the trade,
but we have to put the
banks interests first.
Verlander Is there
anything about deal
books that issuing
banks have seen
recently, especially for
covered bonds, that is
fundamentally new such as new investors or
bigger tickets?
PLATER I agree with that. The 100 per cent senior unsecured
market has proven to be probably the most liquid bond asset
class outside government and semi-government bonds in
Australia. I have no doubt that it will continue to be more
liquid, while RMBS will never be as liquid as either the senior
unsecured or sovereign markets. If liquidity is the core
requirement, RMBS is never going to meet it because its not
THERE SEEM TO BE INVESTORS WHO CONTINUE TO HAVE GOOD
APPETITE FOR RMBS AND TO DIFFERENTIATE THE PRODUCT
FROM COVERED BONDS. OBVIOUSLY THE RISKS ARE DIFFERENT.
BUT WHEN THE YIELD IS HIGHER THAN THEY COULD GET ON
COVERED BONDS THEY ARE HAPPY TO TAKE THE TRADE-OFF.
PETER CASEY ING BANK AUSTRALIA
IT SEEMS POSSIBLE THAT THE HOMOGENEITY OF RMBS AND
COVERED BONDS COULD BE ASSISTED BY THE ABILITY TO ISSUE
RMBS OUT OF MASTER TRUSTS, GIVING INVESTORS A MORE
BULLET-TYPE SECURITY THAT IS CLEARLY A LOT EASIER IN
TERMS OF THE DISCUSSIONS AROUND PRE-PAYMENT.
JUSTIN MINEEFF COMMONWEALTH BANK OF AUSTRALIA
41
OFFSHORE DYNAMICS
Verlander Simon Maidment,
was the ability to do
such successful trades as
Commonweath Bank of
Australias covered bonds
reective of the fact that
Europe is a larger, more
developed market that
maintained liquidity around
yield curves, whereas with
RMBS there is much less of
all those factors?
MAIDMENT In Europe covered bonds
are clearly much better understood
and better followed than RMBS.
Banks in Europe dont get liquidity
credit for buying Australian bank-
issued covered bonds, so we dont
see large participation from bank
investors in our euro issuance. What
we get is a real-money, institutional
investor and pension buyer base
that could be considered the same
kind of buyer base we would be
targeting with double-A minus, senior
unsecured issuance.
That is not really a buyer base that
has historically participated in Australian
RMBS as a relatively short-dated pass-
through security structure doesnt suit
their underlying fund liabilities. The
missing link is being able to do longer-
dated, bullet-type bonds to meet the
needs of this investor group. Master
trust structures are part of the solution.
There is strong interest in Australian
mortgage collateral from offshore
investors. They understand that
collateral because Australian banks
have issued senior unsecured forever
and a day, and the bottom line is that
60 per cent of our balance sheets
are mortgages. We have also issued
RMBS in foreign currencies in the past,
so people have understood the quality
of Australian RMBS credit product.
The real issue is how we can give
global investors RMBS in a format that
suits their investment needs. Foreign
currency and bullet-payment bonds
out of master trusts would potentially
open up a wider investor universe.
However, at the moment it is totally
uneconomic for us to issue foreign-
currency RMBS despite the fact that
qualitatively there is a lot of demand.
The world is short of issuers of high-
quality paper at the moment. Investors
would like exposure to the asset
class, its just that the cost of funds is
uneconomic.
Davison Is that just a product
of the basis swap?
MAIDMENT It is a combination of
factors. First, there continues to be
compelling triple-A RMBS issuance
from the likes of UK and Dutch banks
that is priced at much wider spreads
than makes sense for Aussie RMBS
given the relative strength of the
collateral and services. Secondly, the
basis and pre-payable cross-currency
swaps are very expensive. Again,
master trust structures would provide
some potential relief here by reducing
cross-currency pre-payment risks and
costs.
Verlander Have any new
jurisdictions of demand
interest emerged ouside
Australia?
MAIDMENT I think there is a lot of
qualitative interest. It boils down to
the kinds of levels that make sense
for Australian issuers and the pricing
of competing product for offshore
investors. Unfortunately, there is still a
substantial gap between the two. UK
master trusts are doing deals at Libor
plus 160 basis points with 30 per cent
credit in hand; an Australian RMBS
transaction at the same levels just
wouldnt stack up economically for us.
But investors are interested
in Australian collateral and they
understand its performance. The
question in my mind as this opportunity
develops is whether investors are
willing to differentially price for different
collateral and servicer quality, even
though we are talking about triple-A
RMBS offerings.
TUTTLE We are looking wider, to the US
market for example. We have spent
a lot of time on non-deal roadshows
explaining our acquisition of the
predominantly prime GE mortgage
portfolio in late 2011. We would like to
be able to bring a prime RMBS deal,
market conditions willing, in the second
half of 2012.
We have term funding facilities in
place for the GE mortgage portfolio so
we dont have to come to the market
with any degree of urgency. But frankly
we think its important that we create
a prime RMBS issuing shelf backed
by collateral managed and serviced by
Pepper Australia.
To achieve a sizeable deal we
have to secure a sizeable bid, and that
means we think we may have to do
some of the triple-A notes in the US.
The feedback we have had to date is
encouraging.
I think we have to be careful of
creating short-dated money market
tranches that satisfy current US investor
appetites but then create Australian
dollar-denominated tranches that dont
necessarily satisfy domestic investor
requirements. The other thing we need
to be mindful of is the fact that we may
still require government support to get a
prime RMBS deal done.
AUSTRALIAN BANKS HAVE SOLD SUBSTANTIAL VOLUMES OF COVERED BONDS IN OFFSHORE MARKETS
SINCE REGULATION ALLOWING THEM TO ISSUE THE PRODUCT WAS PASSED IN OCTOBER 2011. ISSUERS
POINT OUT THAT THE LONG-ESTABLISHED COVERED BOND MARKET IN EUROPE MEANS THERE IS A DEEP
POOL OF INVESTORS WHO UNDERSTAND THE PRODUCT. FOR THIS DEMAND TO MOVE TO RESIDENTIAL
MORTGAGE-BACKED SECURITIES (RMBS), HOWEVER, STRUCTURES MAY NEED TO CHANGE.
42 Australian Securitisation Journal | Issue 02_2012
ROUNDTABLE
directly fungible between two different deals; each one has to
be underwritten.
GOVERNMENT SUPPORT
Hendry Is the AOFM
making the RMBS market
more transparent or is it
complicating the situation?
HANNA Continued AOFM presence is
necessary to maintain the market and
stimulate competition, though it has
gone on for a lot longer than even the
AOFM probably expected.
The key issue is what its role will
be going forward. Demand for primary
deals could increase if the AOFM
became involved in the secondary
market rather than limiting support to
primary deals. Its getting to that tricky
stage where it appears a lot of the
efforts over the last two years have
not had a significant impact on pricing
or demand for the overall asset class.
TUTTLE I think the AOFM presence is
still needed. It is filling pockets in the
capital structure that the market still
hasnt fully stepped into. The AOFM
is still there not because the issuers
necessarily want it there but they
need its support in specific tranches of
the capital structure. The AOFM is still
serving a useful purpose, as much as
Id love to get a deal done without it.
I dont ascribe to the view that the
AOFM participation is damaging the
market. It is important to keep non-
bank prime issuance happening, which
I think has been positive. Clearly wed
like to see the government able to
step away, but the AOFMs support is
still needed.
MAIDMENT I think there were some
concerns around relative pricing when
the AOFM was the sole buyer, and
this is still one of the challenges at
the moment: everyone wants 2.5- to
three-year pass-through RMBS, but
someone needs to buy the longer
tranches with extension risk.
Our solution in Medallion 2011-1
was to offer a five-year soft bullet
tranche and that attracted a different
type of portfolio buyer. But in most of
the non-major bank RMBS deals, we
saw that the AOFM was the buyer
of choice for the longer-dated pass-
through tranches.
MCCARTHY When we rate RMBS we
do cash-flow modelling to make
sure transactions are solvent, and a
lot of the time if the AOFM was not
participating at a non-market price
there would be no deal.
MAIDMENT Its true that there is a limit
in terms of where spreads can go in
RMBS. Due to the RMBS structure,
at some point as spreads widen we
will not be able to do a transaction as
there wont be sufficient yield in the
pool.
Clearly this isnt the case for
senior and covered bonds. It almost
provides a natural supply limit at a
point when spreads are widening,
which I would have thought was
attractive, right way around risk for
investors in this asset class.
THE AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT (AOFM) HAS PROVIDED STRONG SUPPORT FOR THE
DOMESTIC RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) MARKET SINCE FIRST RECEIVING THE
MANDATE TO BUY THESE SECURITIES IN 2008. IN TOTAL THE GOVERNMENT DEBT MANAGEMENT AGENCYS
ALLOCATION POOL FOR THE ASSET CLASS AMOUNTS TO A$20 BILLION (US$19.9 BILLION).
IN GENERAL, BANK INVESTORS ARE BUY-AND-HOLD
PARTICIPANTS: THE PAPER GETS CAUGHT UP SO THERE IS NO
LIQUIDITY ON THE OTHER SIDE. WE MIGHT HAVE TO GO TO A
MARKET-CLEARING PRICE LEVEL FOR RMBS TO GET ENOUGH
INVESTORS INVOLVED TO START VELOCITY GOING THROUGH.
PETER HENDRY COMMONWEALTH BANK OF AUSTRALIA
44 Australian Securitisation Journal | Issue 02_2012
FEATURE
THE SLOW BURN
A slow start for the securitisation market
in 2012 has been complemented by the
unleashing of a torrent of covered bonds
from Australias major banks. As the
market adjusts to the changed dynamics
created by a new asset class, investors
are pondering their options. Given the
quality of Australian collateral remains
exceptional their key issues are pricing,
liquidity and structure.
BY KIMBERLEY GASKIN
2011, the Australian Office of Financial Management (AOFM)
played its role in trying to establish a price point for residential
mortgage-backed security (RMBS) transactions, selling A$50
million of four-year RMBS in March at 132 basis points over the
five-year swap rate. This adjustment to the AOFMs holdings
was undertaken as part of its portfolio management activity
and to provide transparent pricing guidance to the market,
noted the agency.
Only a major price contraction of covered bond primary
margins between January and the end of the first quarter
and the sense that most of the tightening that would occur
had happened helped drag RMBS into economically sensible
territory for Australian issuers.
Commonwealth Bank of Australias five-year, domestic
debut covered bond priced at 175 basis points over swap in
January, while ANZ Banking Group (ANZ) priced its inaugural
AUD covered bond in March at 95 basis points over swap. That
contraction brought the relative value proposition for RMBS
swimming just into range.
North of 150 basis points issuance is uneconomical
for any part of the capital structure, comments Robert
Camilleri, managing partner at Realm Investment House
(Realm) in Melbourne. Even at Mays levels RMBS issuance is
only just sustainable.
Secondary market activity across both covered bonds
and RMBS remains quite subdued, with investors reporting
virtually no selling in covered bonds and only a few trades in
RMBS. In terms of what this says about RMBS markets, its
actually quite encouraging, comments John Sorrell, head of
credit at Tyndall Investments (Tyndall) in Sydney. In the days
of the global financial crisis we were deluged with stock. This
time around there is paper available but the flow is much
slower and levels are not blowing out so profoundly relative to
primary levels. Sorrell estimates secondary levels at around
10-20 basis points wider than primary, compared with the
100-150 point blow outs that characterised the financial crisis
period. This is symptomatic of a healthier market, he adds.
T
he most common descriptor for the Australian
securitisation market as April gave way to May
is as prosaic as it is accurate: slow. At A$2.63
billion (US$2.62 billion) equivalent over just three
transactions in the year to May 7, it is the slowest start
for securitisation since the ground zero year of 2008, when
under A$1 billion equivalent was issued by early May.
Towards the end of the first quarter of 2012, with no deals
seemingly on the horizon since First Macs A$300 million
FirstMac Mortgage Funding Trust Series 2-2011 in December
SOURCE: KANGANEWS MAY 7 2012
ANNUAL ABS VOLUMES FROM AUSTRALI AN I SSUERS
70
60
50
40
30
20
10
0
Foreign currency volume (AUD equiv.) AUD volume
2006 2007 2008 2009 2010 2011 2012
V
O
L
U
M
E
(
A
$
B
N
E
Q
U
I
V
.
)
8.4
10
22 24.6
0.97
2.9
1.7
0.9 2 0
SOURCE: KANGANEWS MAY 7 2012
COVERED BOND I SSUANCE BY AUSTRALI AN BANKS
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
CBA WESTPAC ANZ NAB
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
11,832
7,570
6,765
2,829
25
40
25.9
31.9
YTD
45
SIGNS OF LIFE
While the RMBS market has failed to ignite, there are some
encouraging sparks. Even if the overall volume is quite low,
the types and structures of deals are a balm of sorts until
there is less sporadic deal flow. ING Bank Australia (ING)s
A$744 million IDOL Trust Series 2012-1 priced at the end of
March, was a fairly vanilla, price-establishing transaction for
local investors.
The deal was structured conservatively to appeal to local
investors, with a particularly appealing level of subordination
tempting buyers. The transaction carried 3.2 years weighted
average credit support below the senior tranche beginning
at 7 per cent on day one and building to 18 per cent before a
pro rata amortisation between the senior and subordinated
tranches. In Australian RMBS deals it is more typical to double
the subordination over time.
ME Banks A$1 billion SMHL Securitisation Fund 2012-1,
which priced in April, was a cat of a different colour, with a
US$420 million, one-year bullet maturity tranche aimed at
US money market investors. This tranche was supported by a
redemption facility provided by National Australia Bank (NAB),
under which NAB guarantees to underwrite any potential
shortfall in the tranches redemption fund at maturity date.
The years third offering was different again: on May 4
Pepper Homeloans (Pepper) priced the first non-conforming
transaction of the year in a A$300 million deal.
Comments Stephen Maher, head of debt markets research
at Macquarie Bank in Sydney: The diverse deals we have seen
this year indicate the market is returning to some balance
after a very challenging period. We are starting to evaluate or
create fair-value benchmarks between secured on-balance sheet
structures like covered bonds and secured off-balance sheet
structures like RMBS and unsecured securities.
Given the success of the ME Bank deal, market
participants anticipate more targeted, very tailored
structures will emerge as Australian issuers seek new
offshore investors. Adds Maher: We will see issuers running
the structuring spectrum, from vanilla through to complex
structures, and doing so in order to serve the broadest
possible investor group. However, issuance still needs to be
executed efficiently.
It is one thing to provide a structure that works for a
specific set of investors. But institutions providing a cash
flow hedge as in the case of the ME Bank transaction are
taking risk themselves
and there are limits
to the extent to which
they can do this.
Banks will be focused
on identifying what
suits investors and
seeing if that is cost
efficient, adds Maher.
Market participants are circumspect about volume. My
expectation is for sluggish to middling flow this year. Supply of
non-bank RMBS will be largely determined by the participation
of bank investors, however. They have been active buyers of
covered bonds and bank RMBS, but there are no other big
buyers to purchase non-bank RMBS, says Sorrell.
International context is playing a role in this tepid flow.
January and February were peak times of stress in European
funding markets, effectively kyboshing international investor
appetite and sending local real-money investors into their shells.
Comments Camilleri: Internationally there has been strong
focus on the long-term refinancing operation [LTRO] and
investors have focused on LTRO or repo-eligible securities only.
Closer to home the complete rearrangement of the structured
finance market by the introduction of covered bonds affected
real-money investor appetite for RMBS.
COVERED BONDS
But clearly the main contributor to the sluggish beginning
for securitisation has been the advent of a shiny new triple-A
rated asset class covered bonds. By May 7, A$10.1 billion in
covered bond issuance had hit the domestic market over the
course of 2012, with another deal from at least one non-major
bank anticipated to follow. According to KangaNews data, to
May 7 2012 total covered bond issuance since the market for
Australian issuers opened in October 2011 has been US$28.996
billion equivalent; over that same period of time US$10.5
billion equivalent has been issued by Australian securitisation
SOURCE: KANGANEWS MAY 7 2012
I SSUANCE COMPARI SON:
ABS AND COVERED BONDS BY AUSTRALI AN I SSUERS
12,000
10,000
8,000
6,000
4,000
2,000
0
ABS Covered bonds
OCT 11 NOV 11 DEC 11 JAN 12 MAR 12 APR 12 MAY 12
TD
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
4,390
0
0
0
2,250
523
FEB 12
1,868
1,636
10,902 11,089
2,050
2,182
299
998
1,329
We will see issuers running the structuring spectrum,
from vanilla through to complex structures, and doing
so in order to serve the broadest possible investor
group. Banks will be focused on identifying what suits
investors and seeing if that is cost efficient.
STEPHEN MAHER MACQUARIE BANK
46 Australian Securitisation Journal | Issue 02_2012
FEATURE
While the lower levels of
securitised transactions in the
Australian market mimic supply
trends offshore, there is a profound
difference between the reasons
why there is such a difference in
supply. In markets like the US the
level of delinquencies on underlying
mortgages have been so high they
have profoundly compromised
RMBS, leading to very negative
sentiment on the asset class on the
part of investors.
Australia shows its quality
AS DELINQUENCY LEVELS IN OTHER DEVELOPED MARKETS MOST
NOTABLY THE US STAY AT HISTORICALLY HIGH LEVELS, AUSTRALIAN
COLLATERAL PERFORMANCE REMAINS EXCEPTIONAL. WHILE THERE ARE
SOME HEADWINDS FOR THE LOCAL ECONOMY WHICH MAY AFFECT THE
MORTGAGE MARKET, INVESTORS DO NOT ANTICIPATE ANY MAJOR EFFECT
ON RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS).
While the situation in the US continues
to improve it is still markedly worse
than the Australian experience. Fannie
Maes serious delinquency rate
single-family home loans at least three
months past due or near foreclosure
was at 3.67 per cent for Q1 2012,
down from 5.47 per cent a year earlier.
Australia has even outperformed the
UK market, which has itself remained
reasonably resilient. In November 2011
the most recently available data from
Moodys UK prime RMBS 90-day plus
delinquencies were at 1.89 per cent.
The numbers support what Australian
borrowers have been telling offshore
investors since the onset of the global
financial crisis: the Australian market
is different. Tighter lending standards,
a different tax regime and a different
philosophy towards debt have kept
lending within sensible boundaries (see
p16-17).
Moodys does not anticipate that
delinquencies in Australia will rise
over 2012. The low interest rate
environment and moderate economic
growth will offset unemployment and
underemployment in certain sectors
of the economy such as retail and
tourism, comments Arthur Karabatsos,
senior analyst at Moodys in Sydney.
Moodys Analytics expects Australian
GDP to grow to 3.4 per cent in 2012
from 2.8 per cent in 2011. Meanwhile,
the all-important unemployment figure
SOURCE: MOODY S I NVESTORS SERVI CE MAY 2012
DATE AUSTRALIA (60-DAY) AUSTRALIA (90-DAY) UK (90-DAY) IRELAND (60-DAY)
JAN/FEB 12 0.34 0.64 N/A 11.98
JAN/FEB 11 0.31 0.60 1.91 6.6
JAN/FEB 10 0.24 0.49 1.91 3.34
JAN/FEB 09 0.30 0.64 1.82 1.59
SOURCE: MOODY S I NVESTORS SERVI CE MAY 2012
AUSTRALIAN RESIDENTIAL MORTGAGE ARREARS
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
D
E
L
I
N
Q
U
E
N
C
I
E
S
(
%
O
F
C
B
)
90+ 30-60 60-90
2001 2002 2003 2004 2005 2006 2007 2008 2010 2009 2011
issuers. The markets appear to be reflecting one another
clearly: high issuance in one product has tended to coincide
with low levels of issuance in another (see chart on p45).
While INGs IDOL transaction was supported by some
real-money investors, according to the banks Sydney-based
treasurer, Michael Witts, the question resounding through
the Australian seciuritisation market this year has been where
domestic fund managers are.
Paul Garvey, general manager, funding and financial
markets at ME Bank in Melbourne, says he is surprised at
the absence of domestic real-money investors. The issuer
specifically tailored a US dollar tranche for money market
The Australian collateral performance
experience sits firmly at the other
end of the spectrum. According to
Moodys Investors Service (Moodys)
the most recently available data up
to February 2012 demonstrates that
arrears levels are still extremely low in
Australia compared with international
peers. Delinquencies on 90-day plus
mortgages were at 0.64 per cent at
the end of February, a slight increase
on levels from 2011 and 2010 (see
chart on this page).
60/90-DAY DELINQUENCIES: INTERNATIONAL COMPARISON (%)
47
The key point is that for trend growth
of around 3.25 per cent to be achieved,
interest rates need to be lowered
significantly and benign inflation
provides plenty of scope to do so.
SHANE OLIVER AMP CAPITAL
investors so as to diversify investor demand. There is large
pricing divergence between a triple-A rated covered bond and
a triple-A rated securitisation bond, which should appeal to
domestic real-money investors, he comments.
Garvey says the bank sold the subordinated notes of its 2012
transaction to self-managed super funds and high net worth
individuals while most of the senior real money investment
came from the US. There is certainly a market there, but
Australian institutional investors are currently not part of it,
notes Garvey.
It is not that fund managers do not want RMBS. In fact,
some buyers express a preference for the RMBS structure, given
is not widely expected to change
drastically. Most commentators
predict a 2012 average of between
5.1 and 5.7 per cent, while the
April figure was a positive surprise
at 4.9 per cent.
There is no doubt some of
the macroeconomic data from
Australia look soft, however.
According to data from AMP
Capital, retail sales growth has
been weak, up only 2 per cent
in the year to March. In addition,
housing-related activity is sluggish,
with housing prices down around 6
per cent from 2010 highs.
But, as AMP Capitals Sydney-
based economist, Shane Oliver,
says: None of this is to say the
economy is collapsing. Rather, the
key point is that for trend growth
of around 3.25 per cent to be
achieved, interest rates need to be
lowered significantly and benign
inflation provides plenty of scope
to do so. The Reserve Bank of
Australia (RBA) has taken the
initiative, cutting rates by 50 basis
points in May.
The two key areas of concern for
international investors in Australian
RMBS tend to be fear of sharp
house price declines and the
impact of a slowdown in China.
Housing price decline
There has certainly been a decline
in Australian house prices. Over
the 12 months ending March
2012, house prices fell across all
major cities. Brisbane recorded
the largest decline of 6.14 per cent,
followed by Adelaide with 5.66 per
cent. House prices in Sydney fell by
3.15 per cent. On a weighted average
basis, house prices in the capital cities
reduced by 4.39 per cent over the
same period according to Moodys.
However, the broad expectation is
still for a long plateau rather than
a gut-churning drop. In the RBAs
May statement on monetary policy,
following the 50 basis point cash
rate cut, governor Glenn Stevens
expressed some concern but also
stated the reserve banks view
that some stability has emerged.
Housing prices have shown some
signs of stabilising recently, after
having declined for most of 2011, but
generally the housing market remains
subdued, he said.
The China syndrome
As for the impact of a weaker China,
there has yet to be any flow through
on to Australian RMBS. A mighty
confluence of events would be
required to trigger any real reaction,
according to Vera Chaplin, primary
credit analyst at Standard and Poors
(S&P) in Melbourne.
The credit quality of most Australian
RMBS is likely to remain stable,
despite renewed uncertainty over the
global economic outlook and growth
prospects for China, she says. While
S&P expects the performance of the
housing market and housing loans
to weaken, the credit enhancement
available to Australian senior RMBS
is likely to withstand a worsening of
portfolio credit quality.
Chaplins view is based on S&Ps
assessment of the quality of the
RMBS loan portfolio. With the
weighted average loan-to-value
ratio at 62 per cent and weighted
average seasoning at about 60
months, underlying portfolios are
well-positioned to withstand any
deterioration in economic conditions.
Australian households have also
responded quite actively to declining
economic conditions, creating
another layer of protection for RMBS.
Households are actively managing
their financial positions and increasing
their savings by taking advantage of
changes in monetary policy. Property
prices in Australia are declining
gradually, and lenders mortgage
insurance providers as well as lenders
have tightened their underwriting
standards, notes Chaplin. These
preparations have put Australian
households, and especially the RMBS
sector, in a good position to handle a
slowdown in China.
48 Australian Securitisation Journal | Issue 02_2012
FEATURE
When the Australian Office of
Financial Management (AOFM)
announced its intention to purchase
residential mortgage-backed securities
(RMBS) to support competition
in Australias mortgage market in
September 2008, few imagined that
government support would remain
as necessary as it clearly still is nearly
four years later.
The original A$8 billion (US$7.98
billion) purchasing programme was
extended in 2009 by another A$8
billion, and in April 2011 the federal
Treasurer issued a direction for the
AOFM to invest up to an additional
A$4 billion in Australian RMBS. By the
end of the first week in May 2012, the
AOFM had invested A$14.9 billion in
45 RMBS deals, allowing 19 lenders to
raise over A$30 billion in funding.
The AOFM has been weaning the
market off its high level of support,
with its buying falling from A$5.75
billion in 2009 to A$2.1 billion in 2011
(see chart on this page). In 2012 to
May 7 the AOFM had bought A$323.5
million across two transactions ING
Bank (Australia)s A$744 million IDOL
Trust Series 2012-1 and ME Banks
A$1 billion SMHL Securitisation Fund
2012-1.
In its April 2012 update to the
market, the government debt
management agency reiterated
the temporary nature of the
programme and in November 2011
the Department of Treasurys
Withdrawing support
SECURITISATION MARKET PARTICIPANTS LONG FOR AN INDEPENDENTLY
ROBUST MARKET, BUT GOVERNMENT SUPPORT IS STILL A CLEAR NECESSITY.
On a philosophical level, issuers long
to be independent of the government
support. Notes Tim Hughes, treasurer of
Suncorp Bank and chairman of the ASF:
We understand that the programme
is reducing significantly in terms of
how much the AOFM has to invest and
we are equally keen to see the market
stand on its own two feet.
But there is clear acknowledgment
that now is too soon for that support
to be ripped away. The industry will
need to come together to facilitate a
transition from the AOFM regime,
notes Hughes.
Paul Garvey, general manager,
funding and financial markets at ME
Bank, believes that AOFM support
remains important. He says: The
programme was set up to encourage
competition to lending and it is fulfilling
that task at the moment. The AOFM co-
invests with other investors and without
their support it becomes more difficult
for regional issuers to fund effectively
through securitisation markets.
By implication, the remaining A$5.1
billion currently committed by the
government could support over A$10
billion of issuance. However, issuers
are not convinced that primary market
flow will really pick up in the absence
of domestic real-money participation.
Domestic fund managers just
arent buying, and although bank
balance sheets and offshore real-
money accounts are, wed like
to see Australian fund managers
participating, says Garvey.
The AOFM programme was set up
to encourage competition to lending
and it is fulfilling that task. Without
its support it becomes more difficult
for regional issuers to fund effectively
through securitisation markets.
PAUL GARVEY ME BANK
executive director, markets group,
Jim Murphy, talked in more detail
about encouraging a transition
towards a sustainable and innovative
securitisation market that is not
reliant on government support, at
the Australian Securitisation Forum
(ASF)s annual conference.
Not only does the RMBS
market continue to show signs
of resilience, but both the asset-
backed security and commercial
mortgage-backed security markets
seem to showing signs of life as
well, said Murphy. He added: This
is of course partly due to the very
high-quality product that is being
sold. Australian mortgages continue
to record very low delinquencies,
underpinned by the strong Australian
macro economy. In the longer term,
I am confident the securitisation
market will remain an important part
of our financial landscape.
SOURCE: AUSTRALI AN OFFI CE OF FI NANCI AL MANAGEMENT MAY 2012
AOFM BUYI NG PROGRAMME NOVEMBER 2008 TO MAY 2012
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2008 2009 2010 2011
V
O
L
U
M
E
(
A
$
M
)
2012
1,900
5,750
4,780
2,070
323
49
the covered bond product is still in its infancy in Australia.
Institutional investors bought covered bonds in droves in
response to the far wider-than-anticipated pricing on the early
deals, which presented an opportunity too good to pass up.
However, Sorrell believes RMBS have a cleaner structure than
the covered bond product. I would not want to test the claim
on a covered bond because the complexities are immense, he
comments. RMBS are clear cut: the cash flows are determined
by when the mortgages pay back, unlike a covered bond
which has a fixed final maturity that requires disposal of
mortgages that may have a long time to repayment. In the case
of a covered bond you have the whole of the banks balance
sheet to consider.
Realms Camilleri is also remaining circumspect on covered
bonds, in spite of liking the value in the early deals. Covered
bonds have the benefit of overcollateralisation and the balance
sheet guarantee, but banks are not immune to corporate
downgrade. People dont realise the very real nature of the risk
that banks are downgraded to a level where the triple-A rating
on the covered bond comes under pressure, he comments. In
many respects Camilleri is happier with RMBS, which carry no
balance sheet risks. I think the outcomes in the event of default
or downgrade scenarios are clearer with RMBS.
Likewise, Jeff Brunton, head of credit markets at AMP
Capital in Sydney, argues that RMBS have been a bedrock of
stable income. Although he was delighted with the margin on
the early covered bonds, Brunton still likes securitisation. Pre-
payment rates are starting to slow down, but new generation
pools with very good credit enhancement make a really good
contribution to a diversified credit fund, he comments. That
said, Brunton acknowledges that AMP Capital is not buying
much right now.
RELATIVE VALUE AND LIQUIDITY
For domestic fund managers relative value and liquidity
remain key issues, even though the levels on covered bonds
have crunched in so significantly and in spite of their concerns
about the covered structure. Investors say the pricing for the
difference in liquidity between the covered and securitised
products is still not wide enough given the relative illiquidity
of RMBS.
Says Sorrell: Covered bond pricing is certainly more
rational, which has meant an opportunity has opened for
RMBS issuance. However, generally issuers are still wanting
tighter margins on
their RMBS than we are
willing to pay. At 140
basis points over swap
its only just bearable for
issuers, but its only just
bearable for investors
at that level given the
illiquidity of RMBS.
Brunton also feels the gap between issuer and investor
expectations is still too wide when it comes to RMBS. Covered
bonds and senior unsecured have demonstrated some real
liquidity but RMBS has been notably illiquid, he says.
Liquidity for the whole market is strongly influenced by
the Australian Prudential Regulation Authority (APRA) and
the ability for banks to make a market and hold stock on their
balance sheets without punitive capital restrictions. With
clarity on the liquid assets regime also still pending, investors
remain cautious on the liquidity of RMBS and are adamant
about the price they want for that illiquidity. We have had
some dialogue about the price at which we would buy, but its
still not at a level that makes sense for us, notes Brunton.
RMBS is well and truly a buy-and-hold asset, and investors
do not see much changing any time soon. In Australia,
liquidity for the whole market is a challenge because of the
lack of ability for price makers to be able to borrow stock and
make a price. This is because RMBS have traditionally been buy-
and-hold assets and will remain that way until the liquid assets
regulation is clarified, explains Camilleri.
MASTER TRUST STRUCTURES
One option to boost liquidity is the introduction of a master
trust structure to take out the pre-payment risk and offer a
bullet structure to fixed income investors. The Australian
Securitisation Forum (ASF) is working on recommendations
to redraft APS120 to include master trusts. ASF chairman,
Tim Hughes, believes this will also facilitate the international
investor base. European buyers in particular are more
comfortable with master trusts, he comments (see Q&A on p10).
Some domestic investors see merit in the master trust
structure for the non-bank issuers. Camilleri argues that for
a bank issuer there is no real concern around redemption or
refinancing, as these borrowers have other diverse sources
of funding. Consequently, a master trust will only facilitate a
bullet issuance capability given they require a revolving pool.
However, when considering the redemption and call features
of the non-bank issuers, it definitely is a question of concern,
primarily because they have smaller balance sheets, and are
almost always reliant on a banking partner to call deals back
into a warehouse, says Camilleri. Their business model is not as
flexible due to the narrowly-focused funding strategy. He believes
a master trust will work for these players but it will be centred
around the cost, as they need a liquidity provider a bank.
I prefer clean, simple structures. Master trusts and
restructuring into bullet form creates structural
complexity and less clarity on the pool assets which
are more subject to change. It is not clear to me that
the bullet structures will be much more liquid.
JOHN SORRELL TYNDALL INVESTMENTS
50 Australian Securitisation Journal | Issue 02_2012
FEATURE
Sorrell is not convinced a change in structure will alter
liquidity. I prefer clean, simple structures. Master trusts and
restructuring into bullet form creates structural complexity
and less clarity on the pool assets which are more subject
to change, he comments. It is not clear to me that the
bullet structures will be much more liquid especially since
the bullet will most likely still be a soft one unless further
structural complications are added.
WAITING FOR THE CLF
While real-money investors have been notably absent from
securitisation deals, bank liquids portfolio managers have been
supporting the market, outstripping domestic fund manager
appetite for both securitised and covered bond product by a
considerable margin. Bank investors do not share some of the
reservations of fund managers about covered bond structures.
Covered bonds are a great asset, with terrific yield and
a strong rating. We find them so much easier to manage
compared with RMBS because they act like a normal bond
you dont have principal repayments to manage like you do
on mortgages and theres no pre-payment risk, says Colin
Roden, managing director, group treasury at Westpac Banking
Corporation (Westpac) in Sydney.
The only downside as far as Roden is concerned is the
constraint on supply caused by the regulated cap on issuance
and the expectation that going forward most of the covered
bond issuance from the majors will occur offshore.
Certainly bank investors see covered bonds and RMBS as
complementary rather than competitive, in spite of the yield
differential. Given bank balance sheets are not expected to
be a profit centre, their motivations for buying are vastly
different from the drivers for fund managers, which accounts
While we are aware of what qualifies
and what the fees and haircuts are for
the CLF, we dont yet know how much
we actually have to hold in liquids, how
much CLF we can use, what our limits
on level two assets are, and what mix of
assets we can have in the CLF.
COLIN RODEN WESTPAC BANKING CORPORATION
neatly for the difference in
sentiment around the pricing
for liquidity risk.
Comments a second bank
investor: While most fund
managers will look at relative
value between covered bonds
and RMBS, we usually buy
both because we need the
diversity. Covered bonds are generally five-year instruments
while pass-through RMBS typically offer a three-year weighted
average life, so we are happy to carry both.
REGULATORY PAUSE
Bank investors have been active buyers of covered bonds since
the asset class was introduced in Australia, and have been long-
term participants in the domestic RMBS market. While both
asset classes continue to be part of banks buying plans, they
say their appetite has been affected to some degree by pending
liquid assets clarification.
APRA has indicated that internal securitisation, along with
government bonds, domestic bonds issued by supranationals
and other foreign governments, and debt and asset-backed
securities issued by authorised deposit-taking institutions
(ADIs), will be included in the pre-arranged committed
liquidity facility (CLF) vehicles that banks can use to make up
the shortfall on their liquidity coverage ratios (see Q&A on p31).
There is no indication that either APRA or the Reserve Bank of
Australia (RBA) have a desire to reduce the use of internal RMBS
within CLFs.
As a result, bank investors say the CLF regime particularly
the inclusion of self-securitisation has slightly dampened
their appetite for other assets classes. We anticipate more
internal RMBS going forward, notes one bank buyer.
The inclusion of internal RMBS as an acceptable asset in CLFs
takes some of the pressure off ADIs requirement to realign their
liquid assets pools, especially as the RBA does not indicate any
explicit cap on the proportion of the facility that can be made up
of this type of paper (see Q&A on p32).
Internal RMBS remains a significant component of ADIs
liquid assets books. For example, in their most recent half-
year results, ANZ and Westpac reported that they held A$28.6
billion and A$35 billion, respectively, in internal securitisations
in their liquid assets books. ANZs liquid assets book totalled
A$99 billion, while Westpacs totalled A$101 billion.
But until each bank finalises their CLF with APRA, liquid
portfolio managers say they do not expect to conduct a
substantial rebalancing of the portfolio mix. As Westpacs
Roden explains: While we are aware of what qualifies and
what the fees and haircuts are, we dont yet know how much
we actually have to hold in liquids, how much CLF we can use,
what our limits on level two assets are, and what mix of assets
we can have in the CLF.
Covered bonds and senior unsecured have
demonstrated some real liquidity but RMBS has
been notably illiquid. We have had some dialogue
about the price at which we would buy, but its
still not at a level that makes sense for us.
JEFF BRUNTON AMP CAPITAL
51
AUSTRALIA & NEW ZEALAND BANKING GROUP
ISSUER AUSTRALIA AND NEW ZEALAND BANKING GROUP
ISSUER RATING (S&P/MOODYS/FITCH) AA-/Aa2/AA-
REPORTING PERIOD OCTOBER SEPTEMBER
TOTAL DOMESTIC ASSETS (A$BN) 360 (31 MAR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 2 APR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 7,926,913,370
NO. OF LOANS (UNCONSOLIDATED) 28,346
NO. OF LOANS (CONSOLIDATED) 28,346
AVE. LOAN SIZE (CONSOLIDATED) (A$) 279,648
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,972,274
WEIGHTED AVE. CONSOLIDATED CURRENT LVR (%) 64.16
WEIGHTED AVE. CONSOLIDATED
CURRENT INDEXED LVR (%)
64.25
WEIGHTED AVE. INTEREST RATE (%) 6.57
WEIGHTED AVE. SEASONING (MONTHS) 14.65
WEIGHTED AVE. REMAINING TERM (MONTHS) 337.33
INVESTMENT LOANS (%) 22.63
30+ DAY ARREARS (%) 0.17
MORTGAGE POOL BY GEOGRAPHIC DISTRIBUTION:
NSW&ACT / VIC / TAS / QLD / SA / WA / NT (%)
27.72 / 34.78
/ 1.94 / 14.44
/ 5.72 / 14.80
/ 0.61
I SSUANCE SUMMARY TO DATE ( MAY 11)
TOTAL OUTSTANDING IN BENCHMARK FORMAT
(US$M EQUIV.)
6,432
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT
(US$M EQUIV.)
334
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$M EQUIV.) 4,248
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 2,517
COVERED BOND PROGRAMME
ISSUING ENTITY ANZ RESIDENTIAL COVERED BOND TRUST
COVERED BOND RATING (MOODYS/FITCH) Aaa/AAA
PROGRAMME TYPE LEGISLATIVE
PROGRAMME SIZE US$20BN
COVERED BOND GUARANTOR PERPETUAL CORPORATE TRUST
SECURITY TRUSTEE P.T.
BOND TRUSTEE DB TRUSTEES (HONG KONG)
SERVICER AUSTRALIA AND NEW ZEALAND BANKING GROUP
TRUST MANAGER ANZ CAPEL COURT
ASSET MONITOR KPMG
STATUTORY OVERCOLLATERALISATION MINIMUM (%) 3.00
CONTRACTUAL OVERCOLLATERALISATION MINIMUM (%) 5.25
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 20.92 (24 APR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 21.13 (24 APR 2012)
EUR
1,274
USD
1,250
NOK
334
BREAKDOWN OF ISSUANCE BY CURRENCY (US$M EQUIV.)
SOURCE: ANZ MAY 11 2012
AUD
3,146
CHF
761
SOURCE: ANZ MAY 11 2012
ANZ S COVERED BOND I SSUANCE HI STORY
3,500
3,000
2,500
2,000
1,500
1,000
500
0
NOV 11 DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
1,250
O
2,369
3,146
0 0
ISSUER
PROFILES
COVERED BOND
52 Australian Securitisation Journal | Issue 01_2012
ISSUER
PROFILES
COVERED BOND
COMMONWEALTH BANK OF AUSTRALIA
John Needham, Head of Structured Funding, Group Treasury / +61 3 8654 5373 / john.needham@anz.com
Rod Ellwood, Structured Funding, Group Treasury / +61 3 8654 5146 / rod.ellwood@anz.com
FOR FURTHER INFORMATION PLEASE CONTACT: www.anz.com
SOURCE: ANZ MAY 11 2012
ANZ S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES SETTLEMENT
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE
ON
PRICING
USD
VOLUME
(M)
COUPON
TYPE
COUPON (%) LISTING
US05252EAA10 (RULE
144A) US05252FAA84
(REG S)
2011-1 23 NOV 11 23 NOV 16 USD 1,250 1.0000 1,250 FIXED 2.400 NOT LISTED
XS0730566329 2012-1 24 JAN 12 24 JAN 22 NOK 2,000 5.9970 334 FIXED 5.000 LONDON
XS0731129234 2012-2 18 JAN 12 18 JUL 22 EUR 1,000 0.7847 1,274 FIXED 3.625 LONDON
CH0143838032 2012-3 13 FEB 12 13 FEB 19 CHF 325 0.9520 341 FIXED 1.500
SIX SWISS
EXCHANGE
CH0142821468 2012-4 13 FEB 12 13 FEB 15 CHF 400 0.9526 420 FRN
65/3M CHF
LIBOR
SIX SWISS
EXCHANGE
AUAU3CB0191872 2012-5 23 MAR 12 23 MAR 16 AUD 1,000 0.9444 1,049 FIXED 5.250 NOT LISTED
AU3FN0015046 2012-6 23 MAR 12 23 MAR 16 AUD 2,000 0.9536 2,097 FRN 95/3M BBSW NOT LISTED
ISSUER COMMONWEALTH BANK OF AUSTRALIA (CBA)
ISSUER RATING (S&P/MOODYS/FITCH) AA-/Aa2/AA-
REPORTING PERIOD JULY JUNE
TOTAL DOMESTIC ASSETS (A$BN) 550 (JAN 2012)
COVERED BOND PROGRAMME
ISSUING ENTITY CBA
COVERED BOND RATING (MOODYS/FITCH) Aaa/AAA
PROGRAMME TYPE LEGISLATIVE
PROGRAMME SIZE US$30BN
COVERED BOND GUARANTOR
PERPETUAL
CORPORATE TRUST
SECURITY TRUSTEE P.T.
BOND TRUSTEE
DEUTSCHE TRUSTEE
COMPANY
SERVICER CBA
TRUST MANAGER (WHOLLY-OWNED
SUBSIDIARY OF CBA)
SECURITISATION
ADVISORY SERVICES
COVER POOL MONITOR
PRICEWATERHOUSE-
COOPERS
STATUTORY OVERCOLLATERALISATION
MINIMUM (%)
3.00
CONTRACTUAL OVERCOLLATERALISATION
MINIMUM (%)
5.25
CONTRACTUAL OVERCOLLATERALISATION
AT REPORTING DATE (%)
22.20 (30 APR 2012)
TOTAL OVERCOLLATERALISATION
AT REPORTING DATE (%)
81.96 (30 APR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 30 APR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 20,693,452,125
NO. OF LOANS (UNCONSOLIDATED) 83,968
AVE. LOAN SIZE (A$) 246,030
MAXIMUM LOAN BALANCE (A$) 1,642,000
WEIGHTED AVE. CONSOLIDATED CURRENT LVR (%) 61.04
WEIGHTED AVE. CONSOLIDATED CURRENT
INDEXED LVR (%)
57.84
WEIGHTED AVE. INTEREST RATE (%) 6.79
WEIGHTED AVE. SEASONING (MONTHS) 34
WEIGHTED AVE. REMAINING TERM (MONTHS) 316
INVESTMENT LOANS (% BY LOAN BALANCE) 30.29
30+ DAY ARREARS (%) 0.29
MORTGAGE POOL BY GEOGRAPHIC DISTRIBUTION:
NSW&ACT / VIC / TAS / SA / WA / NT (%)
38.95 / 36.08 / 2.51 /
7.67 / 13.67 / 1.12
53
Simon Maidment, Head of Group Funding and Execution / +61 2 9118 1339 / simon.maidment@cba.com.au
Edward Freilikh, Executive Manager, Group Funding / +61 2 9118 1337 / edward.freilikh@cba.com.au /
FOR FURTHER INFORMATION PLEASE CONTACT: www.cba.com.au
SOURCE: COMMONWEALTH BANK OF AUSTRALI A MAY 11 2012
I SSUANCE SUMMARY TO DATE ( MAY 11)
TOTAL OUTSTANDING IN BENCHMARK FORMAT (US$M EQUIV.) 9,684
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT (US$M EQUIV.) 2,056
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$M EQUIV.) 9,591
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 2,149
COMMONWEALTH BANK OF AUSTRALI A S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES
SETTLEMENT
DATE
MATURITY DATE CURRENCY
VOLUME
(M)
FX RATE ON
PRICING
USD
VOLUME (M)
COUPON
TYPE
COUPON (%) LISTING
XS0729014281 1 12 JAN 12 12 JAN 17 EUR 1,500 0.7733 1,940 FIXED 2.625 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 1,875 6.0696 309 FIXED 5.000 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 500 5.9974 83 FIXED 5.000 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 1,000 5.8681 170 FIXED 5.000 LONDON
AU3CB0188951 3 25 JAN 12 25 JAN 17 AUD 2,000 0.9621 2,079 FIXED 5.750 UNLISTED
AU3FN0014866 4 25 JAN 12 25 JAN 17 AUD 1,500 0.9621 1,559 FRN 0.9/BBSW UNLISTED
XS0737866060 5 1 FEB 12 1 FEB 27 EUR 109 0.7672 142 FIXED 3.815 LONDON
US20271AAA51 6 2 MAR 12 2 MAR 17 USD 50 1.0000 50 FRN
135/US
LIBOR
UNLISTED
XS0739982980 7 25 JAN 12 2 FEB 27 EUR 67 0.7707 86 FIXED 3.930 LONDON
XS0744839415 8 13 FEB 12 13 FEB 17 GBP 50 0.6337 79 FRN
138/GBP
LIBOR
LONDON
XS0745915826 9 6 FEB 12 13 FEB 30 EUR 117 0.7616 154 FIXED 3.990 LONDON
CH0180071612 10 15 FEB 12 13 MAR 15 CHF 425 0.9223 461 FRN
60/CHF
LIBOR
SIX SWISS
EXCHANGE
CH0180071613 11 15 FEB 12 13 SEP 19 CHF 350 0.9223 379 FIXED 1.500
SIX SWISS
EXCHANGE
XS0751446872 12 23 FEB 12 1 MAR 27 EUR 50 0.7513 67 FIXED 3.700 UNLISTED
US20271AAB35
(RULE 144A)
US20271BAB18
(REG S)
13 16 MAR 12 16 MAR 17 USD 2,000 1.0000 2,000 FIXED 2.250 ASX
CH0183597266 14 5 MAY 12 5 MAY 22 CHF 100 0.9184 92 FIXED 1.625
SIX SWISS
EXCHANGE
XS0775914277 15 3 MAY 12 3 MAY 22 EUR 1,500 0.7638 1,964 FIXED 3.000 LONDON
XS0778752047 16 9 MAY 2012 9 MAY 2022 NOK 750 0.1685 126 FIXED 4.550 LONDON
SOURCE: COMMONWEALTH BANK OF AUSTRALI A MAY 11 2012
COMMONWEALTH BANK OF AUSTRALI A S COVERED
BOND I SSUANCE HI STORY
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
DEC 11 JAN 12 FEB 12 MAR 12 APR 12 MAY 12
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
6,227
1,373
0 0
2,050
2,182
NOK
689
EUR
4,352
BREAKDOWN OF I SSUANCE
BY CURRENCY ( US$M EQUI V. )
SOURCE: COMMONWEALTH BANK OF AUSTRALI A MAY 11 2012
USD
2,050
GBP
79
AUD
3,638
CHF
932
54 Australian Securitisation Journal | Issue 01_2012
ISSUER
PROFILES
COVERED BOND
NATIONAL AUSTRALIA BANK
ISSUER NATIONAL AUSTRALIA BANK
ISSUER RATING (S&P/MOODYS/FITCH) AA-/Aa2/AA-
REPORTING PERIOD OCTOBER SEPTEMBER
TOTAL DOMESTIC ASSETS (A$BN) 457 (NOV 2011)
COVERED BOND PROGRAMME
ISSUING ENTITY NATIONAL AUSTRALIA BANK
COVERED BOND RATING (MOODYS/FITCH) Aaa/AAA
PROGRAMME TYPE LEGISLATIVE
PROGRAMME SIZE US$20BN
COVERED BOND GUARANTOR PERPETUAL CORPORATE TRUST
SECURITY TRUSTEE P.T.
BOND TRUSTEE DEUTSCHE TRUSTEE COMPANY
SERVICER NATIONAL AUSTRALIA BANK
TRUST MANAGER NAB COVERED BOND TRUST
COVER POOL MONITOR ERNST & YOUNG
STATUTORY OVERCOLLATERALISATION MINIMUM (%) 3.00
CONTRACTUAL OVERCOLLATERALISATION MINIMUM (%) 5.25
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 21.50 (31 MAR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 38.40 (31 MAR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 26 MAR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 4,530,855,224.84
NO. OF LOANS (UNCONSOLIDATED) 17,329
NO. OF LOANS (CONSOLIDATED) 17,329
AVE. LOAN SIZE (CONSOLIDATED) (A$) 261,460.86
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,360,000.00
WEIGHTED AVE. CONSOLIDATED CURRENT LVR (%) 60.39
WEIGHTED AVE. CONSOLIDATED
CURRENT INDEXED LVR (%)
52.19
WEIGHTED AVE. INTEREST RATE (%) 6.65
WEIGHTED AVE. SEASONING (MONTHS) 24.75
WEIGHTED AVE. REMAINING TERM (MONTHS) 326.50
INVESTMENT LOANS (%) 13.77
30+ DAY ARREARS (%) 0.06
MORTGAGE POOL BY GEOGRAPHIC DISTRIBUTION:
NSW&ACT / VIC / SA / WA / TAS / NT (%)
41.69 / 37.39 /
5.79 / 11.89 /
2.50 / 0.73
I SSUANCE SUMMARY TO DATE ( MAY 11)
TOTAL OUTSTANDING IN BENCHMARK FORMAT (US$M EQUIV.) 2,053
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT
(US$M EQUIV.)
776
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$BN EQUIV.) 2,055
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 774
EUR
1,532
NOK
523
BREAKDOWN OF I SSUANCE
BY CURRENCY ( US$M EQUI V. )
SOURCE: NATI ONAL AUSTRALI A BANK MAY 11 2012
SOURCE: NATI ONAL AUSTRALI A BANK MAY 11 2012
GBP
774
NATI ONAL AUSTRALI A BANK S COVERED BOND
I SSUANCE HI STORY
2,500
2,000
1,500
1,000
500
0
DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
523
2,306
0 0 0
55
SOURCE: NATI ONAL AUSTRALI A BANK MAY 11 2012
NATI ONAL AUSTRALI A BANK S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES SETTLEMENT
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE ON
PRICING
USD VOLUME (M) COUPON
TYPE
COUPON (%) LISTING
XS0721652252 SERIES-1 20 DEC 11 20 DEC 21 NOK 2,000 5.9694 335 FIXED 5.000 LUXEMBOURG
XS0721652252 SERIES-1 23 DEC 11 20 DEC 21 NOK 500 5.9442 84 FIXED 5.000 LUXEMBOURG
XS0721652252 SERIES-1 30 DEC 11 20 DEC 21 NOK 625 6.0318 104 FIXED 5.000 LUXEMBOURG
XS0730559894 SERIES-2 13 JAN 12 13 JAN 17 EUR 1,000 0.7821 1,279 FIXED 2.625 LUXEMBOURG
XS0733140460 SERIES-3 20 JAN 12 20 JAN 27 EUR 200 0.7883 254 FIXED 4.080 LUXEMBOURG
XS0737096874 SERIES-4 27 JAN 12 27 JAN 15 GBP 500 0.6459 774 FRN 145/LIBOR LUXEMBOURG
WESTPAC BANKING CORPORATION
ISSUER WESTPAC BANKING CORPORATION
ISSUER RATING (S&P/MOODYS/FITCH) AA-/Aa2/AA-
REPORTING PERIOD OCTOBER SEPTEMBER
TOTAL DOMESTIC ASSETS (A$BN) 582.4 (31 MAR 2012)
COVERED BOND PROGRAMME
ISSUING ENTITY WESTPAC BANKING CORPORATION
COVERED BOND RATING (MOODYS/FITCH) Aaa/AAA
PROGRAMME TYPE LEGISLATIVE
PROGRAMME SIZE US$20BN
COVERED BOND GUARANTOR BNY TRUST COMPANY OF AUSTRALIA
SECURITY TRUSTEE BTA INSTITUTIONAL SERVICES AUSTRALIA
BOND TRUSTEE BNY MELLON CORPORATE TRUSTEE SERVICES
SERVICER WESTPAC BANKING CORPORATION
TRUST MANAGER WESTPAC SECURITISATION MANAGEMENT
COVER POOL MONITOR PRICEWATERHOUSECOOPERS
STATUTORY OVERCOLLATERALISATION MINIMUM (%) 3.00
CONTRACTUAL OVERCOLLATERALISATION MINIMUM (%) 5.25
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 22.55 (31 MAR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 31.50 (31 MAR 2012)
Eva Zileli, Senior Manager, Secured Funding / +61 3 8634 8219 / eva.zileli@nab.com.au
Darren Bell, Manager, Secured Funding / +61 3 8634 2213 / darren.m.bell@nab.com.au /
FOR FURTHER INFORMATION PLEASE CONTACT: www.nab.com.au
56 Australian Securitisation Journal | Issue 01_2012
ISSUER
PROFILES
COVERED BOND
WESTPAC BANKI NG CORPORATI ON S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES SETTLEMENT
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE ON
PRICING
USD
VOLUME
(M)
COUPON
TYPE
COUPON
(%)
LISTING
RULE 144A
US96122WAA80; REG S
US96122XAA63
2011-C1 28 NOV 11 28 NOV 16 USD 1,000 1.000 1,000 FIXED 2.450 LONDON
XS0735613373 2012-C1 8 FEB 12 8 FEB 22 NOK 1,800 6.0485 298 FIXED 5.000 LONDON
XS0735794819 2012-C2 8 FEB 12 8 FEB 22 NOK 1,000 6.0293 166 FIXED 5.000 LONDON
AU3CB0189322 2012-C3 6 FEB 12 6 FEB 17 AUD 1,700 0.9553 1,780 FIXED 5.750 UNLISTED
AU3FN0014874 2012-C4 6 FEB 12 6 FEB 17 AUD 1,400 0.9553 1,466 FRN
165/
BBSW
UNLISTED
XS0747205101 2012-C5 15 FEB 12 16 FEB 16 EUR 1,750 0.7521 2,327 FIXED 2.125 LONDON
AU3FN0014874 2012-C4 24 FEB 12 6 FEB 17 AUD 500 0.9350 535 FRN
165/
BBSW
UNLISTED
SOURCE: WESTPAC BANKI NG CORPORATI ON MAY 11 2012
AUD
3,780
USD
1,000
BREAKDOWN OF I SSUANCE BY CURRENCY
( US$M EQUI V. )
SOURCE: WESTPAC BANKI NG CORPORATI ON MAY 11 2012
EUR
2,327
NOK
464
SOURCE: WESTPAC BANKI NG CORPORATI ON MAY 11 2012
WESTPAC BANKI NG CORPORATI ON S COVERED BOND
I SSUANCE HI STORY
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
NOV 11 DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E
(
U
S
$
M
E
Q
U
I
V
.
)
1,000
0 0 0 0
6,572
POOL DATA
PORTFOLIO CUT-OFF DATE 31 MAR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 9,106,705,020.92
NO. OF LOANS (UNCONSOLIDATED) 36,290
NO. OF LOANS (CONSOLIDATED) 31,016
AVE. LOAN SIZE (CONSOLIDATED) (A$) 250,943
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,980,571
WEIGHTED AVE. CONSOLIDATED CURRENT LVR (%) 62.35
WEIGHTED AVE. CONSOLIDATED CURRENT INDEXED LVR (%) 60.89
WEIGHTED AVE. INTEREST RATE (%) 6.77
WEIGHTED AVE. SEASONING (MONTHS) 39
WEIGHTED AVE. REMAINING TERM (MONTHS) 313
INVESTMENT LOANS (%) 16.67
30+ DAY ARREARS (%) 0.46
MORTGAGE POOL BY GEOGRAPHIC DISTRIBUTION:
NSW&ACT / VIC / QLD / SA / WA / TAS / NT (%)
46.69 / 31.11 /
0.09 / 5.65 /
13.54 /1.66 / 1.26
I SSUANCE SUMMARY TO DATE ( MAY 11)
TOTAL OUTSTANDING IN BENCHMARK
FORMAT (US$M EQUIV.)
7,108
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT
(US$M EQUIV.)
464
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$M EQUIV.) 5,571
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 2,001
Guy Volpicella, Head of Structured Funding and Capital, Group Treasury / +61 2 8254 9261 / gvolpicella@westpac.com.au
John Georgiades, Director, Structured Funding and Capital, Group Treasury / +61 2 8253 1053 / johngeorgiades@westpac.com.au
FOR FURTHER INFORMATION PLEASE CONTACT: www.westpac.com.au
Detailed course information
and registration is available
on our website:
www.securitisation.com.au
ASF 2012 PROFESSIONAL
DEVELOPMENT COURSE DATES
ASF DIPLOMA OF
SECURITISATION
Brisbane
14-15
June
APPLIED WORKSHOP:
ADVANCED
ACCOUNTING
& TAX ISSUES
Sydney
30
July
SECURITISATION
FUNDAMENTALS
Brisbane
APPLIED CORE
MODULE
Sydney
15 25
June June
APPLIED WORKSHOP:
PRINCIPLES OF
CREDIT ANALYSIS
Sydney
26
ASF DIPLOMA OF
SECURITISATION
Melbourne
23-24
July
ANNUAL
CONFERENCE
Sydney
22-23
SECURITISATION
FUNDAMENTALS
Melbourne
25
July
AUSTRALIAN
COVERED BONDS
Melbourne
1
August
APPLIED WORKSHOP:
CONTEMPORARY
LEGAL & REGULATORY
DEVELOPMENTS
Sydney
13
August
13
August
September
AUSTRALIAN
COVERED BONDS
Sydney
22
August
ASF
DIPLOMA OF
SECURITISATION
Sydney
14-15
August
SECURITISATION
FUNDAMENTALS
Sydney
October
20
August
APPLIED WORKSHOP:
TRUSTEE ROLE,
RESPONSIBILITIES &
RELATIONSHIPS
Sydney
Pepper Australia Group would like to thank our investors and
key advisors on the successful completion of
Pepper Residential Securities Trust No.9 (PRS9).
Pepper Residential Securities Trust No.9 (PRS9)
A$300,000,000
Non-Conforming Residential Mortgage-Backed Securities Issue - May 2012
A$72,000,000 Class A1 Notes AAA(sf)/AAAsf
A$138,000,000 Class A2 Notes AAA(sf)/AAAsf
A$38,400,000 Class A3 Notes AAA(sf)/AAAsf
A$13,500,000 Class B Notes AA(sf)/NRsf
A$12,600,000 Class C Notes A(sf)/NRsf
A$9,600,000 Class D Notes BBB(sf)/NRsf
A$6,000,000 Class E Notes BB(sf)/NRsf
A$2,400,000 Class F Notes B(sf)/NRsf
A$7,500,000 Class G Notes Not Rated
Thank you
Trustee
Joint Lead Manager Arranger and Joint Lead Manager
Legal Advisor to Pepper