Challenger goes public

The structured finance sector of the domestic debt capital market saw most activity last week, in terms of issuance and rating actions. The sector, and primarily RMBS, has made something of a comeback this month after a relatively quiet August.

Issuance for September now stands at A$1.5 billion, compared with only A$0.7 billion in August, with at least another A$400 million to come.

The highlight of the week was the launch of Challenger's A$400 million prime RMBS issue. This is the first public RMBS issue since the end of July. All the issuance in the intervening period has been in the form of private placements, making price discovery difficult.

A case in point was Suncorp-Metway's mid-week private placement of A$400 million of prime RMBS via Apollo Series 2008-3 Trust. The 'AAA' rated notes, which have a 2.7 year weighted average life, were priced at 130 bps over bank bills. The 'AA-' rated subordinated tranche amounting to A$44 million, was retained by Suncorp.

The issue followed the establishment of a revolving A$1 billion RMBS warehouse facility by St George the week before. Pricing was not disclosed on that issue but was thought to be around the 120 bps mark. However, this is now in doubt, given where Suncorp priced its latest issue.

It seems that credit spreads are drifting wider again and, given current market conditions, this is hardly surprising. Suncorp privately placed A$500 million of 'AAA' rated RMBS with a similar weighted average life at the start of August, at a margin of 120 bps over bank bills. This was consistent with the pricing seen on other issues around that time and Adelaide Bank even achieved 110 bps on its Torrens Series 2008-3 issue.

The pricing of the Challenger issue should be telling. The deal consists of three tranches: A$383 million of Class A notes, preliminary ratings and A$11.8 million of Class AB notes, preliminary ratings (each with triple A ratings), and A$5.2 million of Class B notes with preliminary ratings of 'AA-/Aa3/AA-' from S&P, Moody's and Fitch. (Note: the Class AB notes are subordinated to the Class A notes.)

There was also talk that Macquarie Group is readying a A$500 million prime RMBS issue. It is expected that this will be a public issue and as such, will also test where credit spreads really lie at the present time.

Earlier in the week there was a report that Goodman Australia Industrial Fund is considering a securitisation of some industrial assets. If it proceeds, Westpac is set to lead a A$250 million CMBS issue but no indication of timing was given.  The last CMBS issue was from Liberty Series 2007-1 SME/CMBS Trust in October last year.

Year to date issuance volume for the structured finance sector, as a whole, stands at A$9.4 billion compared with A$48.8 billion for the same period last year. But by this time last year, the impact of the credit crunch was already being felt.

On the ratings front, Standard & Poor's was the most active rating agency in the sector, raising ratings on tranches of Medfin Trust Series 2004-2 and CNH Capital Australia Trust No.3 notes and lowering ratings on two tranches of Seiza Augustus Series 2007-1 Trust notes.

On the Class B, Medfin Trust Series 2004-2 notes, S&P observed that a rating uplift to 'AAA' from 'A' was supported by the performance of underlying assets (automotive, furniture, fittings and commercial equipment receivables) and increased subordination support to the Class B notes. The credit rating assigned to the Class B, CNH Capital Australia Trust No.3, notes was raised to 'AAA' from 'BBB' as the Class B notes are now the senior notes following the complete amortisation of the Class A notes. The Class B notes will now amortise sequentially and have adequate subordination support for the rating.

The lowering of the credit ratings assigned to the Class E and F notes of the Seiza Augustus Series 2007-1 Trust reflects the on-going deterioration in the performance of the underlying portfolio of subprime mortgages. Losses booked against the unrated Class G notes are mounting and a large proportion of delinquent mortgages now exceed 90 days in arrears, increasing the likelihood of loss. Ratings on the Class A, B, C and M notes were affirmed, while ratings on the Class D, E and F notes remain on CreditWatch with negative implications.

Moody's raised the credit rating assigned to the Class B notes issued by CNH Capital Australia Receivables Trust 4 to 'A3' from 'Baa2', citing the performance of the underlying assets (agricultural and construction equipment loans) and increased subordination support for the notes. The subordination support provided by the seller notes to the Class B notes now amounts to 9.7 per cent of the underlying receivables pool, up from 3.5 per cent at the closing of the issue.

It's the middle of September and there has been no domestic corporate bond issuance in Australia since mid August, when the Australian branch of Bank of Scotland issued A$525 million of two-year bonds.

S&P assigned an 'A' rating to a proposed floating rate transferable deposit to be issued by the Sydney branch of Taiwan's Mega International Commercial Bank. And while the bank has a A$600 million debt issuance program, it has established a pattern of issuing just A$350 million of securities at a time. It first made such an issue in October 2006 with a November 2007 maturity. These bonds were rolled over with a November 2008 maturity.

There has been more activity in New Zealand, with steady issuance through August, ASB Bank raising NZ$270 million last week, Westpac New Zealand launching a minimum NZ$50 million bond issue and QTC again adding to its 2017 kauri bond. ASB launched a minimum NZ$50 million bond issue the week before and with strong retail demand was able to raise NZ$270 million for six years at 130 bps over swap. This pricing compares favourably with what could be achieved in Australia but is no doubt aided by the participation of retail investors.

Recognising a good opportunity, Westpac New Zealand was quick to follow suit. Although its minimum NZ$50 million bond offering has a five-year maturity, it is still offering a coupon of 130 bps over swap. Pricing is scheduled for September 22.

Queensland Treasury Corporation raised a further NZ$175 million in New Zealand after adding NZ$325 million to its September 2017 kauri issue in early August. This latest top-up takes outstandings to NZ$875 million.

Both Fitch Ratings and S&P issued bulletins on Origin Energy. S&P affirmed the 'BBB+/A-2' ratings assigned to Origin but moved the rating outlook to positive on the news that it had sold a 50 per cent interest in its Queensland coal seam gas reserves to ConocoPhillips and would enter into a joint venture for their development.

Fitch left the 'BBB+/F2' ratings assigned to Origin on Rating Watch Positive but changed its rationale. Fitch noted the deal will improve Origin's financial and business profile. The Rating Watch will be resolved when the joint venture has been finalised and Fitch has reviewed Origin's business plans. At the same time, Fitch affirmed the 'BBB+/F2' ratings assigned to New Zealand subsidiary, Contact Energy, and removed them from Rating Watch.

Moody's Investors Service moved to downgrade Redbank Project Pty Ltd. again, moving the rating to 'Ba3' from 'Ba1', where it was lowered in early August. The rating remains on review for possible downgrade.  Redbank Project operates the Redbank Power station near Singleton in NSW and sells power into the NSW electricity grid. The full plant outage is continuing and management expects generation will not re-commence until the end of October.

Moody's also changed the outlook on the 'A3' senior secured rating assigned to Transurban Finance Company to negative from stable. The change reflects the impact on Transurban's financial profile arising from its investment in DRIVe. A sell-down of the investment had been anticipated but is now looking less certain. Moody's also noted that a leverage covenant based on market capitalisation is coming under pressure.

The 'BB+/B' ratings on New Zealand companies Equitable Mortgages Ltd. and Equitable Life Insurance Co. Ltd. were affirmed by S&P but the outlooks were amended to negative from stable on deteriorating asset quality. Non-performing assets have increased and may translate into materially increased losses.