No fire sale of AOFM RMBS

The Australian Office of Financial Management will not conduct a fire sale to meet the Government's deadline for divestment of its holdings of residential mortgage-backed securities.

The AOFM has been forced to review its process after the first two RMBS auctions fell short of expectations, with the volume of notes sold significantly below the amounts offered.

In the May Budget the Government announced that the AOFM would divest its RMBS holdings, valued at A$4.6 billion at the time. The AOFM's plan is to auction between $300 million and $500 million of RMBS a month.

The initial sale on June 24 yielded $160 million of the $500 million of securities on offer and the second, on July 14, yielded $96 million of $500 million of securities offered.

Speaking at a meeting of the Australian Securitisation Forum last week, AOFM chief executive Rob Nicholl said his organisation did not feel pressured to respond in future auctions by selling large volumes at low prices to catch up with its divestment schedule.

Nicholl said: "Given the lack of trading data for the secondary RMBS market we fully expected that it would take some time for expectations to adjust, although we had probably underestimated the extent of the gap in expectations revealed so far.

"It may take some time to reach a better alignment. We are not going to run some sort of fire sale."

Nicholl said there was an expectation that the portfolio would be divested by the middle of next year but nowhere was it stated that the portfolio had to be liquidated by a certain date.

"The Treasurer is more concerned about negatively impacting the RMBS market than meeting some arbitrary deadline," he said.

The AOFM will continue with its procedure of announcing sale schedules several months ahead. This has been done to allow issuers to work around the schedule in formulating their own plans.

A potential drawback of this approach is that it reduces the AOFM's ability to react to market interest and sell specific securities in a timely manner.

"We see this as a necessary trade-off and are of the view that announcing our plans up to a few months ahead strikes the right balance between competing considerations," Nicholl said.

The AOFM will also continue with its practice of using reserve prices.

Nicholl said: "Once set, we do not exercise judgement on whether to shift the reserve price in light of an examination of the bids we receive.

"In one case, the Apollo 2010-1 notes in the first auction, the difference between the reserve price and the lowest bid was particularly small. However, our process does not allow for moving the reserve price once bids have been examined. To do so would cut across our objective of maintaining the highest standards of probity."

The next auction is scheduled for August 18.