Few buyers for MEB mortgage bonds

Australian lenders felt the impact of contagion from the US sub-prime mortgage crisis on Friday, when Members Equity Bank announced that it had withdrawn a residential mortgage backed securities issue from sale.

The $500 million Maxis program issue of broker-originated loans had been on the market for a week.

The lead arranger, Westpac Investment Bank, had set an indicative price of 16 basis points over the bank bill swap rate for the top tranche.

The Australian RMBS market has been booming this year, with record issuance and very tight spreads.

European, Asian and US investors had been keen buyers of Australian mortgage securities, which were seen as quality investment in comparison to US paper.

Only a week ago speakers at the Australian Securitisation Forum in Sydney had expressed their confidence that the local RMBS market would not be affected by the sub-prime crisis.

Typical of the view at that meeting were comments made by Macquarie Bank's Kevin Stephenson, who said: "The Australian market will still be seen as quality.

"Deals are going to get away fine. Issuers will pay a little more spread but issuance will continue in the second half of the year."

The loans in the Members Equity portfolio were all to prime credits. There were no low doc or no doc loans.

Members Equity chief financial officer Nick Vamvakas said on Friday: "There was no demand for any issue, including ours.

"The report we got from Westpac was that investors were staying away.

"We increased the price to 18 points over but there was still no investor activity. We felt it was in our best interests to withdraw the issue."

Vamvakas said Members Equity had no immediate need for funding. It has warehouse facilities in place with lines of credit from several banks and investment banks and has no need to go to the debt capital market for some time.

Members Equity has two funding programs: SMHL, which is for in-house origination; and Maxis for broker originated loans.

The SMHL program has issued a total of $15 billion of RMBS securities, the most recent a $3.2 billion issue in May.

Maxis is a much smaller program and has issued a total of $1.5 billion of securities.

Vamvakas said: "There is a buyers' strike because of what has happened in the sub-prime market and the hedge fund market. The markets are on hold."

While MEB chose to withdraw their bond, Bank of Queensland did finalise pricing at the end of last week on a $1 billion financing of lease receivables.