Back to the beginning for RMBS market
More volume is emerging in the market for mortgage-backed securities in Australia and New Zealand this week, though the size and style of transactions are reminiscent of the infant era of this market more than a decade ago when deals were small, the subordinated percentage high and the chief challenge was to find investors for the more lowly rated tranches.
Superficially the trend for the market is looking brighter, with two deals this week from Liberty Financial (a non-conforming funder), a debut deal for Columbus Capital (for near prime loans sourced from Bluestone, otherwise an underwriter of sub-prime loans) and a second deal since the credit crunch from Macquarie Puma (all for low doc loans).
All are markers of a revival in some way, such as the $400 million commercial paper program for Liberty Financial - a short term "conduit" funding long term loans - with liquidity facilities provided by National Australia Bank. The Liberty CP conduit will fund both residential mortgages and car loans.
A New Zealand dollar securitisation by Liberty of primarily non-conforming loans, the Nautilus transaction for Columbus (pulled off in the face of some hairy rumours) and the placement of a wholly low doc transaction by Puma speak to the reopening of the market. FirstMac also settled a $250 million RMBS deal yesterday.
These three, or four including the CP deal, are worth more than $1 billion, or about the size of a single, representative asset-backed transaction a year ago.
There's also talk of private placement activity, with investors said to be reviewing about twice as many asset-backed transactions as are being made public.
To make the senior, and AAA-rated, tranches attractive to domestic bond buyers (and with offshore buyers largely out of the picture) issuers have had to increase the level of subordination on the junior tranches to between eight per cent (used by FirstMac) and 10 per cent (used by Puma), or resort to super senior tranches (such as by Adelaide Bank last week on a Torrens deal, and also needed, more conventionally, by Bluestone and Liberty).
The credit watch negative, and probable downgrade in the credit rating, of PMI Group, a major mortgage insurer, is another factor affecting the asset-backed market.
The need to make sure that senior tranches qualify for AAA ratings without worrying about the credit rating of the insurer is also driving the increased size of the subordinated tranches.
The difficulty is there are not that many investors around interested in buying subordinated debt from such mortgage pools - there may be as few as five such buyers at the moment according to some issuers.
This means that while there is a little more activity the spread paid by issuers over the bank bill rate is widening.