Market solutions opening RMBS market in UK
The penultimate AOFM backed RMBS issue, under the original A$8 billion allocated for this purpose, priced during the week. The RESIMAC Premier Series 2009-2 priced: A$75 million of Class A1 notes with a weighted average life of 0.5 years, at 75 basis points over bank bills; A$185 million of Class A2 notes with a weighted average life of 3.3 years, at 140 bps over; and A$18.3 million of Class AB notes with a weighted average life of 3.5 years, at 195 bps over. Pricing on the remaining tranches was not disclosed.Investor take-up of this issue was considerably stronger than that seen for the Liberty PRIME Series 2009-2 issue the week before. AOFM bought the Class AB tranche in full but only A$38.1 million of the Class A2 tranche. This was a pleasing result.Only FirstMac remains to issue to complete the allocation of AOFM's initial A$8 billion of funding. FirstMac announced on Friday that it is planning a A$400 million RMBS issue to be launched this week.AOFM has yet to release any details on how it intends to apply its second allocation of A$8 billion but is consulting with industry participants. In the meantime, and given the recent announcements on the continuation of government support for the local RMBS market, it is interesting to observe what is happening in Britain. The British government's ABS Guarantee Scheme was due to expire on Thursday and was not expected to be extended because it was not used. The pricing of the guarantee support at 25 bps plus the median five year CDS rate of the originator ensured the economics of any transaction would not be viable. However, Fitch Ratings reported that the UK market participants are now finding their own solutions to get the RMBS market functioning again. Spread compression in recent months means the UK market has also worked through its own secondary market overhang to bring spreads to a level where primary issuance can again be economic. Nevertheless, two key structural initiatives have emerged to give investors added comfort. One is a put option back to the originator of the RMBS, which effectively ensures liquidity for the issue. Of course this will really only work with originators with investment grade credit ratings or better. This may also rob banks of the incentive to securities assets as they may not qualify for capital relief.The second is the use of a defined maturity date to overcome extension risk. If these structural features enter into common use in the UK, and particularly in Europe, then they should be rapidly adopted here. This would supersede the need for any similar secondary market support that AOFM may provide - and it won't mind a bit.