Seiza Augustus close to default

Standard & Poor's announced yesterday that it may lower the rating on a tranche of Seiza notes from CC to D after learning from the trust manager that noteholders are "not expected" to receive an interest payment due on August 28.

The investors affected are Seiza Augustus Series 2007-1 class F noteholders.

S&P said the balance of the notes had been written down to zero, which triggers the cessation of interest payments on the notes.

Seiza Capital provided secured finance to small business owners. The group appointed administrators last September and a month later a meeting of creditors voted to pass control to Causeway Asset Management.

At the time, Seiza had $1.1 billion in mortgages under management. Of this, $239 million was funded through an ASX-listed trust Seiza Augustus, and the remainder through a warehouse trust.

RBS funded the senior debt in the warehouse trust while Goldman Sachs and Babcock & Brown (including the satellite Everest Babcock & Brown) were investors in the subordinated and equity tranches, and will bear most of the losses.

The class F notes have been in trouble for some time. Initially rated B by S&P, they were put on ratings watch negative in June last year, downgraded to CCC in September, to CCC- in January and CC in June.

Only the A and B tranches of Seiza Augustus 2007-1 have maintained their initial ratings (AAA and AA respectively).

In a report on the trust published in June, S&P said the downgrades were "a result of continual deterioration in the performance of the underlying portfolio." Class G notes had already been charged off.

S&P said: "This portfolio has a high concentration of interest-only loans, which in our opinion may experience refinancing challenges as they reach their maturity dates.

"Furthermore, the portfolio may experience poor recovery from the defaulted mortgages due to the portfolio's concentration on properties in troubled areas with poor recoverability.

"Consequently we expect further defaults and losses to emerge in the short to medium term. The class E notes will be the next class that is extremely vulnerable to this exposure."

If the class F notes default it will be only the second such event in the Australian structured credit market. In May two tranches of Allco's Mobius trust defaulted.