ASJ #2 May 2012

AS
Incorporating Australian
Securitisation & Covered Bonds
>> Issue 02
2012
AUSTRALIAN
SECURITISATION
JOURNAL
Australian structured product:
custom tted for on- and offshore needs
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Who understands
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CONTENTS
FOREWORD
WELCOME
ASF INSIGHTS
Q&A
COVERED BONDS
HOUSING MARKET
ROUNDTABLE
LEGAL EYE
Q&A
Q&A
ROUNDTABLE
FEATURE
ISSUER PROFILES
The Hon. Wayne Swan MP
Deputy Prime Minister and Treasurer of Australia
Chris Dalton
CEO, Australian Securitisation Forum
The Australian Securitisation Forum
outlines its efforts in an ever-changing
structured product market environment.
Tim Hughes
Chairman, Australian Securitisation Forum
Standard & Poors explains
its ratings rationale and where
Australia fits into the global picture.
The Reserve Bank of Australia
looks at the state of play in the
Australian housing market,
including lending standards.
US investors and Australian issuers talk
international RMBS demand, facilitated by
National Australia Bank.
Sidley Austin partners discuss the consequences
of a landmark post-Lehman legal decision for the
Australian market.
Greg Tanzer
Commissioner, Australian Securities and Investments Commission
Guy Debelle
Assistant Governor, financial markets, Reserve Bank of Australia
RMBS in the Australian domestic market:
a buy- and sell-side perspective hosted by
Commonwealth Bank of Australia.
Taking the pulse of Australian structured finance
following the arrival of covered bonds.
Key asset class data on Australias
first clutch of covered bond issuers.
2
4
6
10
11
16
18
28
31
32
34
44
51
ANZ Banking Group
Commonwealth Bank
of Australia
51
52
54
55
National Australia Bank
Westpac Banking
Corporation
AS
Incorporating Australian
Securitisation & Covered Bonds
>> Issue 02
2012
AUSTRALIAN
SECURITISATION
JOURNAL
ASF MANAGEMENT
COMMITTEE
Chairman
Tim Hughes
Deputy Chairman
Patrick Tuttle
Treasurer
Chris Green
Chief Executive Officer
Chris Dalton
Chief Operating Officer
Alex Sell
asf@securitisation.com.au
+61 2 8243 3900
www.securitisation.com.au
www.kanganews.com
+61 2 8256 5555
Managing Director
Samantha Swiss
sswiss@kanganews.com
Editor
Laurence Davison
ldavison@kanganews.com
Staff Writer
Chelsea Wallis
cwallis@kanganews.com
Contributing Editor
Kimberley Gaskin
kgaskin@kanganews.com
Project Manager
Brydie Wright
bwright@kanganews.com
Subscriptions Manager
Jennie Wright
jwright@kanganews.com
Design Consultants
Hobra Design
www.hobradesign.com
Depsito Legal: B-36961-2011
Printed in Spain by CEVAGRAF, SCCL
ISSN

1839-9886
ASF 2012 EXCEPT ISSUER PROFILES
SECTION ( KANGANEWS). REPRODUCTION
OF THE CONTENTS OF THIS MAGAZINE IN ANY
FORM IS PROHIBITED WITHOUT THE PRIOR
CONSENT OF THE COPYRIGHT HOLDER.
FOREWORD
2 Australian Securitisation Journal | Issue 02_2012

I
ts really great to once again have the opportunity to introduce the semi-annual industry
journal published by the Australian Securitisation Forum (ASF). The first edition was packed
with informative articles and perspectives from across the industry an interesting and
enlightening read.
It has certainly been a turbulent ride for the industry since I wrote my foreword to
the previous Australian Securitisation Journal in September 2011. The inaugural issuance of
Australian covered bonds, the clarification of liquidity rules for banks and daily developments
in precarious European financial markets have marked a very interesting period.
International financial markets are still behaving cautiously in many respects, but Australia has
continued to fare reasonably well, in part due to the critical passage of our covered bonds legislation.
With the world reeling from credit rating downgrades, austerity packages and perilous financial markets,
covered bonds have been vital in opening a new, more reliable window for Australian lenders to diversify
their funding sources, at lower cost and for longer maturities.
Since the passage of legislation, over A$28 billion (equivalent) of covered bonds has been issued by
Australian banks in six denominations. With the largest Australian banks paving the way, opening the
market and establishing a template for
future issuance, I am looking forward
to some competitors to the major banks
taking advantage of this new funding
source.
As for our securitisation market, there
was a flurry of activity in late 2011 during
which pricing noticeably deteriorated
as investors kept one eye firmly on
international market developments.
Following the Christmas break, with
covered bond issuance jumping to life, Australian securitisation markets remained subdued. It has been
encouraging to see residential mortgage-backed securities (RMBS) issuance resume. In particular, it is
great to see the industry using innovative structures to attract new investor demand offshore. Whether
this development proves to be a more permanent feature of our market, only time will tell. But it does
demonstrate the importance of innovation for the industrys future.
I am proud of the government support for RMBS issuance, which preserved the markets superstructure
during the most profound dislocation in global markets in generations, and has continued to support new
issuance so smaller lenders can keep competing.
I am also confident that the industry is well placed to face the future we have sound public finances
with very low debt, solid growth, low unemployment and, as I continue to enjoy telling my international
counterparts, no Australian prime RMBS has ever defaulted.
Thanks again to Chris Dalton and his colleagues at the ASF, and I hope you enjoy this edition of the
Australian Securitisation Journal.
CANBERRA, APRIL 27 2012
THE HON. WAYNE SWAN MP
DEPUTY PRIME MINISTER AND TREASURER OF AUSTRALIA
With the largest Australian banks paving
the way, opening the covered bond market
and establishing a template for future
issuance, I am looking forward to some
competitors to the major banks taking
advantage of this new funding source.
Commonwealth Bank of Australia ABN 48 123 123 124, Australian Financial Services Licence 234945,
(Commonwealth Bank) is incorporated in Australia with limited liability. CLA1549
We can tackle the big jobs.
Just look at our CV.
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Besides having the right connections and a strong business base, our customers
also benefit from our years of experience and expertise. To find out how we can help
your business, contact Commonwealth Banks securitisation team today.
Call your Relationship Executive or visit
commbank.com.au/institutional
Pepper Residential Securities Trust No. 9
Non Conforming Residential
Mortgage Backed Securities
A$300 Million
Joint Lead Manager
May 2012
RedZed Trust Series 2011-1
Residential Mortgage Backed Secured Pass
Through Floating Rate Notes
A$80 Million
Arranger and Lead Manager
December 2011
Acquisition of GE Capitals Residential
Mortgage Portfolio in Australia and New Zealand
A$5,000 Million
Senior Financier
August 2011
Super Members Home Loans Series
Securitisation Fund 2012-1
Prime Residential Mortgage Backed Securities
A$1,000 Million
Joint Lead Manager
April 2012
IDOL Trust Series 2011-2
Prime Residential Mortgage Backed Securities
A$750 Million
Joint Lead Manager
November 2011
FLEXI ABS Trust 2011-1
Consumer Asset Backed Securities
A$133 Million
Arranger and Sole Lead Manager
June 2011
ASF
WELCOME
A
fter more than three years in the role of chairman of the Australian Securitisation
Forum (ASF) we bid farewell to Stuart Fuller, who has stepped down from the ASFs
National Committee due to the demands of his new role as global managing partner
of King & Wood Mallesons. The National Committee expressed its deep gratitude for
Stuarts contribution and leadership of the ASF since 2009. We wish him luck in his
new and exciting Hong Kong-based role.
We are pleased to welcome Tim Hughes, treasurer of Suncorp Bank, as the new ASF
chairman (see Q&A on p10). Tim joined the National Committee in 2010 and his treasury responsibilities
at Australias largest regional bank, including experience in funding through securitisation and possibly
in the future through covered bonds, makes him an ideal person to lead the ASF. Patrick Tuttle, chief
executive officer of Pepper Australia, continues as a deputy chairman and a second deputy chairman will
be appointed in mid-2012 by the National Committee.
The ASF also congratulates Greg Medcraft, ASIC chairman, on his appointment as chairman of the
International Organization of Securities Commissions (IOSCO). The ASF considers Greg to be an ideal
candidate for this role given his international experience and leading role in IOSCOs Task Force on
Unregulated Markets and Products. The ASF is committed to work with bodies such as IOSCO to rebuild
securitisation markets by improving disclosure and other market practices.
In this edition of the ASJ we profile the activity in Australias emerging covered bond market, which
opened in late 2011 following the passing of legislation to facilitate such issuance by Australian banks.
Despite volatile market conditions, numerous issues of covered bonds have been made by the four major
Australian banks, denominated in a variety of currencies. One of the objectives of the ASF in 2012 will
be to work with the industry to develop a reporting and disclosure standard for issuers of Australian
covered bonds. This will build on the disclosure and reporting standards already established for Australian
residential mortgage-backed securities (RMBS) and asset-backed securities (ABS) collateral pools.
Australias securitisation market has had a slower-than-usual start in 2012, partly as a result of the
focus of the four major banks on establishing their covered bond programmes. Nonetheless, a variety of
mortgage- and asset-backed issues have been completed to date including auto loans, prime residential
and non-conforming mortgages. The latest RMBS by ME Bank included an innovative US dollar tranche,
which is an encouraging sign that demand exists among US investors for high-quality Australian RMBS.
A key body of work to be championed by the ASF in the second and third quarters of 2012 will be
to garner industry input to contribute to the development of a new prudential standard (APS120) to be
drafted by the Australian Prudential Regulation Authority (APRA) in 2012. The ASF commends APRA for
undertaking a comprehensive reconsideration of the standard given the development of the market and
the impact of the 2008 financial crisis. We are keen to contribute to assist the development of a clear
principle-based standard which will apply to securitisation by Australian financial institutions.
The introduction of covered bonds and the continued diversity of ABS and RMBS are promising
developments for Australias debt capital market and global investors looking for exposure to the
Australian economy.
I hope you find this second edition informative and look forward to seeing you at the 2012 ASF annual
conference at the Hilton Sydney on 22 and 23 October 2012.
WELCOME TO THE SECOND
EDITION OF THE ASJ
CHRIS DALTON
CEO, AUSTRALIAN SECURITISATION FORUM
22&23 OCTOBER 2012, HILTON HOTEL, SYDNEY
AUSTRALIAN SECURITISATION
FORUMS ANNUAL CONFERENCE
For more information and registration details please go to
www.securitisation.com.au/asf2012
ANALYSIS
ASF NEWS
AND INSIGHTS:
Structured finance
market dynamics
Keeping an eye on changing market
conditions and the developing regulatory
environment has kept the Australian
Securitisation Forum (ASF) the
industrys peak body busy engaging
with all market participants, from
government though to issuers and
investors.
S
ince the inaugural edition of the Australian
Securitisation Journal (ASJ) in 2011, we have seen a
flurry of covered bond issuance by the four largest
Australian banks, into a number of currencies
and sold to a range of investor types (see charts on
this page and facing page). This issuance, something the ASF
advocated for over almost a decade and by March 7 totalled
A$28 billion (US$27.9 billion) equivalent, was great to witness.
We are also poised to see other Australian banks follow the
majors down this path. The development of this market has
been fantastic to see, particularly given the cost and access
issues associated with senior unsecured and residential
mortgage-backed securities (RMBS) markets in Europe.
But the introduction of covered bonds has changed RMBS
demand characteristics. The spreads at which some of the
covered bond deals priced pushed out RMBS curves to levels
that made it uneconomic for many issuers that were otherwise
ready to go to market, as shown in the chart on p7 by the hiatus
in RMBS issuance between December 2011 and February 2012.
In April 2012 we witnessed A$1.75 billion in RMBS issuance
by two large retail banks, ING Bank (Australia) and ME Bank.
This has resuscitated confidence among other RMBS issuers
that deals can be done and that investor indigestion created by
consecutive domestic jumbo covered bond deals has ended.
In discussions with Australian domestic fixed income
investors, we are told that many bought the inaugural local
covered bond deals because of the coupon generosity of the
issuers. Before those inaugural deals came to market, however,
many domestic investors said they would not buy because they
could not see relative value to senior unsecured and RMBS.
Indeed, many of those investors have sold down their holdings
to lock in attractive annualised returns given the tightening in
secondary market spreads.
To summarise, then, we hope that the volume and pricing
effects of covered bond deals in the local market will find a
natural level and permit the market for RMBS to return to the
levels to which we became accustomed in 2011.
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
AUSTRALIAN COVERED BOND ISSUERS
7
6
5
4
3
2
1
0
V
O
L
U
M
E

(
A
$
B
N

E
Q
U
I
V
.
)
ANZ NAB CBA WESTPAC
Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12
7
What ongoing global volatility has also taught us is that the
governments programme of being a cornerstone investor in
RMBS remains crucial it gives certainty to issuers, confidence
among private sector investors and liquidity to the market.
Indeed, the governments agency charged with managing the
programme the Australian Office of Financial Management
Co-chaired by Vernon Spencer
and Robert Camilleri, this active
sub-committee seeks to initiate
and respond to matters that
seek to enhance the operational
effectiveness of our market, and
its standing globally. This year,
following developments in RMBS
market standards and practices
in 2011, the ASF has launched
its ABS Disclosure & Reporting
standards. Particular thanks on this
project go to ANZ Banking Groups
Gary Sly and Resimacs Belinda
Smith. Next off the blocks is the
ASF Covered Bond Disclosure &
Reporting Standard, which will be
led by National Australia Banks
Eva Zileli.
We continue to have close
dialogue with regulators in relation
to these standards insofar as our
progress on bedding down the
standards in the local market is
concerned, as they are seen as
key to investor confidence and
financial stability.
Market standards & practices
(AOFM) actually sold a small parcel of its RMBS holdings in
March 2012 to support price discovery in the broader market.
We are, however, very alert to the risks posed by the
political changes afoot in Europe, most recently in the form
of French and Greek voters opposition to austerity measures
agreed and the fiscal stability pact entered into by their past
COVERED BOND CURRENCIES
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
V
O
L
U
M
E

(
A
$
B
N

E
Q
U
I
V
.
)
AUD EUR NOK USD CHF GBP
Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12
RECENT SECURITISED ISSUANCE
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
V
O
L
U
M
E

(
A
$
B
N

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Q
U
I
V
.
)
RMBS CMBS ABS Small-ticket CMBS
Dec 10 Mar 11 Jun 12 Sep 11 Dec 11 Mar 12
Other initiatives underway include:
Bondholder communications
in order to facilitate reliable and
predictable information flow between
issuers, trustees and end investors
and their custodians. The Australian
Securities Exchange (ASX) and the
ASF are in discussions on how this
might be operationalised, and the
costs involved. The motivation for
this rests with difficulties experienced
by issuers and trustees in identifying
end investors whenever noteholder
consents are required. Having an ASX
ticker for individual RMBS and ABS
series may also permit other benefits
such as a single reference point to
access monthly reporting and perhaps
in due course price quotations.
Synthetic RMBS Reference Curve.
Led by Robert Camilleri, ASF board
member and managing partner
of Realm Investment House, this
initiative seeks to alleviate two related
Achilles heels in our RMBS product
price discovery and liquidity such
that we cast an archetypical collateral
pool backing an archetypical A1 AAA
tranche of RMBS (for both bank
and non-bank issues, respectively)
in order to solicit bid/offer spreads
from buy- and sell-side market
participants on a quarterly basis. The
process is likely to be akin to the
non-synthetic methodology adopted
by the Australian Financial Markets
Association for its administration of
the bank bill swap rate.
For bank issuers of RMBS,
considerable interest is being paid
to the clean slate to which the
Australian Prudential Regulation
Authority (APRA) has committed in
terms of its prudential approach to
bank securitisation. The ASF has a
cross-section of Australian issuers
as well as legal and accounting
experts to ensure that we can fully
support APRA in its endeavours to
deliver a prudential standard that
better reflects the realities of todays
securitisation landscape.
ANALYSIS
and Treasurer (whom we thank again for the governments
support of the industry and his opening remarks in this
edition of ASJ), Assistant Treasurer, the Australian Treasury
and AOFM in Canberra, the RBA, our market regulators the
Australian Securities and Investments Commission and the
Australian Prudential Regulation Authority state revenue
offices (particularly Queensland and South Australia), and
others. At a parliamentary level too we have remained
engaged, backgrounding the coalition Treasury team and key
backbenchers on market and policy matters.
In 2012 we lodged submissions to the Securities Exchange
Commission, the International Organization of Securities
Commissions and others in a bid to both promote and protect
our market, largely by making the case to revise or exempt
Australia from unwanted and in some cases unintended
negative consequences. We will be monitoring amendments
to the rule-making arising from the Dodd-Frank Act and
the Volcker Rule. In Europe, in due course, we would like to
continue to advocate having Australian collateral accepted at
the European Central Bank and Bank of England.
We will be maintaining the high level of our resource
allocation to these initiatives in order to remain trusted,
providing counsel that is genuinely useful to our stakeholders
and our market.
Our new chairman, Tim Hughes, has touched on offshore
investor opportunities in his Q&A published in this issue
of ASJ (see p10). We solicit issuer and arranger member
feedback on these costly initiatives. Given the importance of
offshore investors, we will continue to promote Australian
securitisation and covered bonds in new markets such as Japan
and Taiwan, and maintain dialogue with longstanding but
presently not especially deep markets for Australian RMBS
and ABS, such as Europe and Asia. It is especially in that latter
camp, south- and north-east Asia, where we see scope for AUD,
USD and JPY accounts to find value for issuers and investors
alike given the painfully high cross-currency basis swap costs
between AUD/EUR and AUD/GBP.
At recent meetings in Melbourne and Sydney, the
ASFs Fixed Income Investor Forum sought feedback
on a number of the initiatives in the areas under
discussion at the ASF in terms of market standards
and practices (see box on p7). We are delighted to
have such a vibrant local investor market and very
much welcome their contribution to ensure that the
outcomes of our work reflect the realities of both the
buy and sell sides of the structured credit market.
Offshore, we will be resuming our global investor
outreach with various sessions in London, Tokyo and
Singapore. Again, just as with Australian fixed income
investors, we see it as key to understand these
investors preferences and expectations so we can
ensure a sustainable awareness and a reputation as a
reliable partner that is visible and responsive.
Investor engagement
SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012 SOURCE: MACQUARI E DEBT MARKETS ANALYSI S APRI L 30 2012
RMBS OUTSTANDING BY MAIN ISSUANCE CURRENCIES AUSTRALIAN RMBS ISSUANCE BY MAIN ISSUANCE CURRENCY
200
175
150
125
100
75
50
25
0
70
60
50
40
30
20
10
0
V
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L
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E

(
A
$
B
N

E
Q
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V
.
)
V
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E

(
A
$
B
N

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Q
U
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V
.
)
AUD AUD EUR EUR USD USD GBP GBP
Dec 95
1
9
9
4
2
0
0
2
1
9
9
8
2
0
0
6
1
9
9
6
2
0
0
4
2
0
0
0
2
0
0
8
2
0
1
1
1
9
9
5
2
0
0
3
1
9
9
9
2
0
0
7
2
0
1
0
1
9
9
7
2
0
0
5
2
0
0
1
2
0
0
9
2
0
1
2
Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11
leaders. The UK has also reported another recession, which we
hope will not be long-lived, but given deep unemployment and
sluggish growth among its neighbours this is far from assured.
What this all means indirectly for Australian RMBS, asset-
backed securities (ABS) and covered bond investor sentiment
remains to be seen, but we predict it will cause ongoing
nervousness. Thankfully, our economy remains robust albeit
with slowing growth to levels more in keeping with the
Reserve Bank of Australia (RBA)s central inflation target. This
should relax the strength of the Australian dollar albeit beside
a trend of ongoing weakening of the euro.
ENGAGEMENT WITH GOVERNMENT
Ever since the brutal effects of the 2008 financial crisis, the
ASF has recognised the importance of relationships with
policymakers. This includes The Deputy Prime Minister
9
Notwithstanding the Australian markets desire to
see much greater offshore participation, we now see from
outstandings that in that paradigm to date the market has
found a natural depth of around A$75 billion. The recent
US$300 million A1 bullet 2a-7 money market tranche from ME
Banks SMHL 2012-1 proved very successful for both the buy-
and sell-side and, accordingly, arrangers are looking closely at
harvesting further opportunities in the US.
We would also like to take this opportunity to thank
our education partner, the Australian Financial Markets
Association, which provides ASF with the necessary marketing,
editorial and administrative scale to support our courses.
Finally, in terms of new horizons, the chairman has
touched on the online module initiative that will enable us
to deploy our Securitisation Fundamentals course in markets
that previously either for reasons of cost or distance have
been unable to get access to our entry-level course. We are
also delighted to be taking our education syllabus across the
Tasman to our colleagues in New Zealand. This includes ASF
Securitisation Fundamentals, ASF Covered Bonds Workshop
and, we predict, our Diploma in Securitisation.
Forthcoming course dates can be found on the inside back
cover of this magazine.
A less conspicuous but by no means junior mission
for the ASF is its education and training offering.
Since November 2011 the ASF has delivered six
covered bond courses in Sydney, Brisbane and
Canberra, equating to approximately 100 market
professionals receiving contemporary content and
teaching. Leading practitioners from their respective
fields have devoted huge amounts of their firms time
to producing the content for not just covered bonds
but also for our new advanced-level course, Applied
Securitisation. The new course is now available online
for participants to book.
While there is an Applied Programme that permits
industry practitioners to follow a pathway that
mandates our core module (comprising Securitisation,
Cash Flow and Waterfall Modelling) plus two
electives, we also recognise that some will just
want to take up a module applicable to their day-to-
day role supporting securitisation products within
their business. To help facilitate this, we have taken
the decision to make the Contemporary Legal &
Regulatory Developments, Advanced Accounting
& Tax Issues, Principles of Credit Analysis and
Transaction Governance modules available on an la
carte basis.
We would like to acknowledge the contribution of
numerous ASF members and firms in this enterprise,
which we know is a great benefit to the whole
industry benefits and is doubtless one of the reasons
we are one of the few countries to still have an
enduring product.
Education mission
FOR FURTHER INFORMATION PLEASE CONTACT:
Contributors include:
Core Module Structuring, Cash Flow
and Waterfall Modelling
Robert Camilleri, REALM INVESTMENT HOUSE
David Chisholm, MRGIJ HOLDINGS
Steve Magan, J.P.MORGAN
Advanced Accounting & Tax Issues
Heather Baister, DELOITTE
Richard Balfour, ERNST & YOUNG
Phil Lee, DELOITTE
Graham Mott, DELOITTE
Debbie Hankey, DELOITTE
Tung Dao, ERNST & YOUNG
Contemporary Legal & Regulatory Developments
Sonia Goumenis, ALLEN & OVERY
Karolina Popic, ALLEN & OVERY
Trustee Role, Responsibilities & Relationships
Glenn White, AUSTRALIAN EXECUTOR TRUSTEES
Angelo Kalafatas, PERPETUAL
Mark Dickenson, PERPETUAL
Magnus Wilson-Webb, BNY MELLON AUSTRALIA
Jim Brooks, BNY MELLON AUSTRALIA
Tessa Hoser, NORTON ROSE AUSTRALIA
Principles of Credit Analysis
Robert Camilleri, REALM INVESTMENT HOUSE
David Chisholm, MRGIJ HOLDINGS
Steve Magan, J.P.MORGAN
Hayden Went, COMMONWEALTH BANK OF AUSTRALIA
Justin Mineeff, COMMONWEALTH BANK OF AUSTRALIA
Alex Sell
Chief Operating Officer
+ 61 2 8243 3900
asell@securitisation.com.au
Q+A
W
hat key dynamics
are affecting
the Australian
securitisation
market?
The year has started
slowly in terms of primary issuance. A key
contributor to that continues to be the
difficulty in offshore markets. The large
investor base that existed prior to the
financial crisis is no longer there.
The domestic securitisation market
has proven to be resilient and robust.
But our key challenges are how we can
attract offshore investment back into
our market and how we grow domestic
investor involvement. We have a certain
degree of reliance on offshore markets,
so we are working hard to uncover new
opportunities that work for both issuers
and investors.
Another key issue is how the
Australian market develops an
exit strategy from its reliance on
the Australian Office of Financial
Management (AOFM) buying
programme. The programme is
reducing in terms of how much the
AOFM has to invest and we are equally
keen to see the market stand on its own
two feet. But the industry will need to
come together to facilitate a transition.
How can Australian issuers engage
more with offshore investors?
We expect to see more engagement
going forward as issuers tailor tranches
attractive to both domestic and offshore
investors, such as we saw with the recent
ME Bank transaction. This deal included
a one-year bullet maturity supported by a
redemption facility provided by National
Australia Bank (NAB), under which NAB
guaranteed to underwrite any potential
shortfall in the tranches redemption
fund at maturity date.
We see potential for more investor
demand out of the US in particular, and
the ASF is doing some work alongside
issuers to cultivate this buying base.
Although smaller issuers and domestic
issuers still have the problem of the basis
swap to contend with, we anticipate
more activity with US investors going
forward.
There is also some real momentum
in parts of Asia, particularly Japan and
Taiwan, where investors are looking
for yield and longer-dated secured
investments. These investors are
comfortable with Australian risk and
are gaining more understanding of
residential mortgage-backed securities
(RMBS) product and structures.
Real-money investors are less
prominent in the RMBS market
right now. What will reignite their
appetite?
There is still a core investor base that is
comfortable with RMBS, but there may
be some benefit in introducing a master
trust structure to take out the pre-
payment risk and offer a bullet structure
to fixed income investors.
We are currently working on
recommendations around redrafting
local regulation which will look to
establish and include master trusts. This
will be important for both domestic and
offshore investors.

What are the ASFs key priorities
for 2012?
We are looking to build on successes
in the disclosure and reporting space,
As the Australian structured finance market continues to
change in response to new opportunities and old challenges,
the objectives of the Australian Securitisation Forum (ASF)
are developing and expanding. The ASFs incoming chairman,
Tim Hughes, discusses how the ASF is responding to
developing environment.
focus on prudential regulation reform,
promote and build our industry
reputation in domestic and overseas
markets, and ensure that the industry
can become self-sustainable in the
medium to long term. We will also
continue to focus on our successful
education programmes, which have
been instrumental in expanding the
knowledge and expertise in our industry.
How is the ASF engaging with
government and regulators?
Liaison with government and regulators
is extremely important to the ASF.
We have most recently been heavily
involved in dialogue with the Australian
Prudential Regulation Authority (APRA)
about APS120. We have been able to
discuss the issues for borrowers that are
seeking clarity around whether they
should execute funding transactions
or full capital relief transactions and
resolving the uncertainty around the
sell-down of subordinated tranches. The
regulator has welcomed our feedback and
will be considering our recommendations
as it comes to redraft APS120.
We are maintaining strong
relationships and open dialogue with
the federal government, engaging with
both sides of the political spectrum, the
department of Treasury, and the AOFM
around developments in our industry.
The ASFs education mission is
critical to the development of the
Australian market. How is the
programme progressing?
We have developed a fantastic
programme that is very well supported
by all sides of industry. Our focus
is to make sure the programme is
current and relevant. We have already
introduced a covered bond programme,
for example, and we will continue
to offer education resources that
illuminate the secured market. We
are also focused on the delivery of our
resources and we are looking into online
applications for our courses.
TIM HUGHES
CHAIRMAN, AUSTRALIAN SECURITISATION FORUM
11 11
WHY STANDARD &
POORS CLASSIFIES
AUSTRALIAN COVERED
BOND PROGRAMMES
ALONGSIDE CANADA
AND MUCH OF EUROPE
S
tandard & Poors Ratings Services (S&P) recently
published its approach to rating covered bonds
in Australia, where a combination of market
conditions and new laws has encouraged major
banks to quickly adopt this alternative funding tool
over the past six months.
Vera Chaplin, structured finance regional practice
leader for Asia Pacific, answers some key questions on the
rating agencys assumptions for classifying covered bond
programmes in Australia, including why the country is ranked
alongside Canada and much of Europe. She also explains why
uptake of the new asset class has been strong in Australia and
why she expects interest in covered bonds to stretch into new
territories across the Asia Pacific region.
IN APRIL 2012, S&P DETAILED ITS RATINGS
ASSUMPTIONS FOR AUSTRALIAN COVERED BONDS
FOR THE FIRST TIME, PLACING THE COUNTRY IN THE
CATEGORY 2 GROUP. WHAT DOES THIS MEAN?
Under the S&P global criteria for assessing asset-liability risk
in covered bond programmes, we segment these programmes
into three distinct categories that consider primarily the
jurisdiction of a programme and its ability to access external
financing or monetise the cover pool. These categories, along
with the asset-liability mismatches (ALMM) percentage,
determine a programmes maximum potential rating uplift
over the rating on the issuer.
The potential ratings uplift ranges for Category 1, 2, and
3 programmes is five to seven, four to six, and three to five
notches, respectively. For each category, maximum ratings
may be achieved within the range, dependent on the extent of
the ALMM exposure. In short, the lower the ALMM exposure,
the higher the rating uplift that may be achieved within the
range in each of the three categories.
S&P has placed Australia in Category 2. This means
Australian covered bond programmes are assessed at the
same level as Canada and most European countries, including
covered bonds issued by Finland, France (structured covered
bonds), Ireland, Italy, Luxembourg, the Netherlands, Norway,
Portugal, and the UK (see table on p13).
Under Category 2, the maximum potential rating that can
be achieved by an issuer is between four and six notches above
the rating on the issuer. For example, an issuer rated A can
issue a AAA-rated covered bond if all other risks are addressed.
Given that the maximum achievable rating is capped at AAA,
it is possible that highly-rated issues may retain some unused
uplift, which may create a certain amount of rating stability if
the rating on the issuer were lowered.
WHY ARE AUSTRALIAN COVERED BOND
PROGRAMMES NOT PLACED IN CATEGORY 1?
The Australian covered bond market has a limited history
compared with many well-established markets in Europe,
which also benefit from more diverse funding options. As
a result, countries such as Denmark, France (obligations
foncires), Spain and Germany sit in Category 1.
S&P HAS ALSO CLARIFIED THE TARGET ASSET
SPREADS FOR AUSTRALIAN PRIME RESIDENTIAL
MORTGAGE LOANS, PLACING THESE LOANS IN
BUCKET 1. CAN YOU PROVIDE DETAILS ON THIS
CLASSIFICATION?
Under our global criteria, we group the cover pool assets in
jurisdictions into one of three buckets and assign a target
asset spread for each bucket for the purpose of market-value
assessment in the event the underlying cover pool needs to
be monetised.
The Bucket 1 classification means that if the Australian
residential-loan cover pool at exposure (as estimated under
our ALMM assessment) needs to be liquidated to repay
covered bonds outstanding, we would apply a discount rate
of a target spread of 425 basis points over the benchmark rate
to calculate the present value of the projected cash flow from
the collateral pool.
CO-PUBLISHED
FEATURE
CO-PUBLISHED
FEATURE
This target asset spread reflects a shock spread, which
is derived from analysis of a number of external sources
combined with S&Ps own analytical opinion on the suitability
and relevance of this data. Also, comparisons are made to
similar products in other markets.
We analysed the secondary market trading margins of
Australian AAA-rated prime residential mortgage-backed
securities (RMBS) as a proxy for residential mortgage loan
sales in Australia. We have included only prime RMBS in our
analysis, as this is in line with the eligibility requirement to be
included as cover pool assets. We also considered the extent
offshore markets affect Australia, given it has a level of reliance
on offshore funding. While Australian RMBS have performed
well to date from a credit perspective, the Australian funding
market tends to be influenced by key global capital markets.
As such, and in line with the key global markets, we assigned
Australian prime residential mortgage loans to Bucket 1 with
respect to target asset spread.
S&PS RATINGS METHODOLOGY FOR COVERED BONDS
LOOKS SPECIFICALLY AT FIVE KEY AREAS, BUT THERE
SEEMS TO BE A STRONG FOCUS ON ALMM RISK. WHY
IS THIS SO?
First, it is important to stress that all five key areas of S&Ps
ratings analysis for covered bonds are important. These
include legal risk, operational and administrative risk,
counterparty risk, asset risk, and cash flow risk, which
includes ALMM risk assessment.
The reason the ALMM risk is important is that covered
bonds tend to have bullet maturities that may create asset-
liability mismatch risk, and there are diverse opinions on
the importance of this risk. From our perspective, where
there is an ALMM risk exposure, the covered bond ratings
will be weak-linked to the ratings of the financial institutions
that issue them. We start with the scenario of insolvency of
the covered bond issuer, because the covered bond ratings
are typically elevated above the issuer rating and we need
to look to the cover pool cash flows for rating elevation
above the issuer rating. We then assess whether there may
be substantial recovery from the cover pool to meet the
outstanding covered bonds in conjunction with available
mitigating factors for the ALMM risk.
SUMMARY OF STANDARD & POORS REVISED CRITERIA FOR ASSESSING ASSET-LIABILITY MISMATCH RISK IN COVERED BONDS
Five key areas of Standard & Poors covered bond ratings analysis
See relevant criteria
Standard & Poors 2009
Asset risk
STEP 1:
ALMM classification =
=
=
=
=
Zero
Low
Moderate
High
STEP 2:
Programme categorisation
Category 1 Category 2 Category 3
STEP 5:
The covered bond rating
Compare target credit
enhancement with available
credit enhancement
STEP 3:
The maximum potential
covered bond rating
Determine target credit
enhancement to achieve maximum
potential ratings uplift
Max
potential
rating uplift
(notches)
STEP 4:
Cash flow and
market value analysis
CATEGORY
ALMM risk 1 2 3
Zero Unrestricted
Low 7 6 5
Moderate 6 5 4
High 5 4 3
Cash flow risk Legal risk
Operational and
administrative risk
Counterparty risk
13
The overcollateralisation sizing is less sensitive to the
rating on the issuer or the rating migration because of the
assumption of issuer insolvency at the outset. Our recent study
Most Covered Bond Ratings Hold Steady As Issuer Ratings Fall found
that over the six months to April 2012, almost 40 per cent of
our ratings on institutions that issued covered bonds were
lowered. However, only 16 per cent of covered bond ratings
were lowered over the same period and 91 per cent of covered
bond ratings remain in the AAA/AA rating categories.
IN S&PS VIEW, WHY HAVE AUSTRALIAS BIG
FOUR MAJOR BANKS BEEN QUICK TO TAKE UP THE
OPPORTUNITY TO ISSUE COVERED BONDS, BOTH IN
AUSTRALIA AND OFFSHORE?
Although covered bonds have a very long history in some
European jurisdictions, Australian banks were prohibited from
issuing them until the Australian legislative framework for
covered bonds came into effect in October 2011.
In a short space of time, however, covered bonds have
emerged as an additional part of the funding mix for the
major banks, with issuer and investor sentiment toward
this funding tool now very favourable. Each of Australias
four major banks which remain materially dependent
on wholesale funding have established covered bond
programmes and by April 18 together they had issued more
than A$22 billion (US$21.9 billion).
Apart from the legislative changes, the flurry of covered
bond issuance in Australia has coincided with the adverse
market conditions in funding markets worldwide, especially
STANDARD & POORS COVERED BOND PROGRAMME CATEGORISATION
Category 1 Category 2 Category 3
Range of funding
options
A programme has the flexibility to raise
funds through BOTH asset sales AND
borrowing from either banks or the central
bank. There are no restrictions on when or
how funds can be raised.
A programme is able to raise funds EITHER
through asset sales OR borrowing from
either banks or the central bank. There are
no restrictions on when or how funds can
be raised.
A programmes access to funding is
RESTRICTED so the sale of assets is forced.
Strength of funding
sources
The covered bond market has, in our
opinion, a long and WELL-ESTABLISHED
history. In our view, systemic importance
of the product is HIGH. We consider if
there is a broad range of banks that are
able to lend. We evaluate if there would
be adequate demand among a broad range
of investors for the assets backing the
programme.
The covered bond market has, in our
opinion, a LIMITED history. In our view,
systemic importance is not as strong as
Category 1. We consider if there is a
broad range of banks that are able to lend.
We evaluate if there would be adequate
demand among a broad range of investors
for the assets backing the programme.
The covered bond product is NEWLY
ESTABLISHED in that jurisdiction. In our
view, systemic importance is LOW. We
consider if banks are unable to lend to
programmes. We evaluate if there is
uncertain demand among a broad range
of investors for the assets backing the
programme.
Jurisdictions Denmark, France (obligations foncires),
Germany, Spain, Sweden
Australia, Canada, Finland, France
(structured covered bonds), Ireland, Italy,
Luxembourg, The Netherlands, Norway,
Portugal, UK
Greece, US
Maximum potential
number of notches
uplift from the ICR
5 - 7 4 - 6 3 - 5
SOURCE: STANDARD & POORS
in Europe, as well as banks growing preference for secured
funding. Financial market dislocation and continued
instability have heightened the importance of diversification
of the investor base of Australias major banks, and it is clear
that Australian banks believe covered bonds play a part in
serving this purpose.
IS INVESTOR DEMAND FOR COVERED BONDS LIKELY
TO SPREAD ACROSS THE REST OF THE ASIA PACIFIC
REGION?
Anecdotal evidence suggests that issuer and investor interest
in covered bonds is growing strongly across the Asia Pacific
region, although so far actual covered bond transactions
have been largely from banks based in Australia, New
Zealand and Korea.
However, we note that some policymakers in the region
are preparing to introduce new legislative- or rules-based
frameworks for covered bonds. For example, the Reserve Bank
of New Zealand and the Monetary Authority of Singapore have
released consultation documents on the subject.
Although Asia Pacific jurisdictions have taken a legislative
light approach to covered bond regimes, we believe
legislation creates confidence for investors and issuers on how
stakeholders, such as regulators, will treat covered bonds. In
some Asia Pacific jurisdictions, another key challenge relates to
the assessment of ALMM risks, particularly in countries where
there is limited secondary market information available. In
S&Ps analysis, we look to assess other mitigating factors for
ALMM risk.
CO-PUBLISHED
FEATURE
PRUDENT MORTGAGE
LENDING STANDARDS
HELP FINANCIAL
STABILITY: LESSONS
FROM THE US
M
any observers look at the US housing meltdown
and wonder whether it could happen in
other countries. For a number of reasons, that
would be unlikely. The US has some unique
characteristics that enabled the meltdown.
In most countries, increased mortgage distress occurs with
economic downturns. That has been the experience of Ireland
and Spain, for example. Mortgage distress does not normally
precipitate a crisis, so why was the US experience so different?
The reasons are complex, but they can be boiled down to
lax lending practices. Lending standards eased in the US far
beyond what was seen in other countries. And they eased in
a way that exacerbated the tendency of mortgage borrowers
to default in a bust. The system of financial regulation did
not stop this easing: there were gaps in both prudential and
Luci Ellis, head of the financial stability
department at the Reserve Bank of
Australia (RBA) in Sydney, investigates
the US housing meltdown, highlighting
the unique set of circumstances that led
to a crisis. In doing so, she points out
why mortgage distress would be unlikely
to precipitate a crisis in countries like
Australia, which do not have the same lax
lending practices that existed in the US.
consumer protection regulation. Even where regulation
applied, it did not prevent lending practices not seen
elsewhere, especially around income documentation and
amortisation and not just in sub-prime.
DANGEROUS ASSUMPTIONS
Sub-prime lending has long been a niche in US mortgage
finance. The established lenders understood that it was a risky
customer base: people with a history of missing payments on
other debt. Yet brokers and lenders did not verify incomes or
other financial obligations of sub-prime and other non-prime
borrowers. Instead, they focused more on collateral value. If
housing prices kept rising, lenders assumed, the borrower
could either refinance or sell, and everything would be fine.
Alongside lending standards at the point that the loan is
made, what happens during the life of the loan also matters a
great deal. Some recent research by economists at the Federal
Reserve suggests that it was not high proportions of sub-
prime loans that predicted which districts would have worse
outcomes for prices and loan defaults (Barlevy and Fisher
2010). Rather, it was the proportion of new lending that was
interest-only loans. These loans were not being paid down. In
some cases, the loan balance was increasing through cash-out
refinancing or explicit negative amortisation. Paying your
mortgage down before the bust is the most effective way of
avoiding getting into negative equity once housing prices start
to fall, so it is no wonder US households were more likely to get
into trouble.
LAX TAX, RE-DRAWS AND ELASTIC SUPPLY
It turns out that a range of tax and legal differences in the
US, as well as industry convention, created a system that
discouraged amortisation. For example, US owner-occupiers
mortgage interest is tax-deductible, which is not a feature of
the Australian or Canadian tax systems (Ellis 2010). In addition,
most US mortgages are fixed rate, and the variable-rate
mortgages that were on offer did not allow the borrower to
make pre-payments that can be redrawn later if needed. Such
redraw loans are common in Australia and have proven a
highly effective vehicle for precautionary savings.
This meant that in the US, loan-to-valuation ratios (LVRs)
that were high at origination stayed high well into the life
of the loan. American households are less likely to pay their
mortgages down ahead of schedule than Australians. And
trade-up buyers seem to have high LVRs in the US, which
doesnt appear to be the case in Australia. As a result, US
housing stock is far more leveraged than that in Australia.
Another unusual feature of the US system is that housing
supply is quite elastic, at least in enough parts of the country
to matter. The housing boom was a construction boom as
well as a price boom. As a result, by 2006 there was already a
substantial overhang of excess supply. The inherent stock-flow
interaction in the housing market means that construction
17
booms sow the seeds of their own destruction. Prices can
undershoot formerly sustainable levels.
The US mortgage market is also unusual in its reliance
on capital markets for funding. During the boom, on-balance
sheet mortgage lending was not seen as being a profitable
or attractive business for US banking institutions a stark
contrast to Australia and many other countries.
MAINTAINING STANDARDS
As the RBA has made clear many times before, one important
reason Australia did not go down the same road as the US is
that lending standards did not ease as much here. Even at its
peak, sub-prime lending was only ever a tiny fraction of the
total. Low-doc loans were also a small niche.
And we never saw in Australia the explosion of zero-deposit
loans or worse, the 125 per cent loans that were available in
the UK. In Australia in recent years, around two-thirds of new
mortgage borrowers from banks had an initial LVR below 80
per cent. If we look at the whole mortgage book, that fraction
is even higher.
A large part of the reason why lending standards did not
ease as much here is that prudential supervision is stricter.
Unlike in the US, in Australia most mortgage lending is done
by firms that are prudentially regulated. Also unlike the
US, there is only one prudential supervisor, the Australian
Prudential Regulation Authority (APRA). Australian lenders
cannot arbitrage differences in prudential treatment across
different regulators.
Some Australian mortgage lenders are not prudentially
supervised, though, so consumer protection standards around
credit are a vital part of the authorities defence against a
US-style outcome. These standards have been broadened in
Australia in recent years, and shifted to a national framework
administered by the Australian Securities and Investments
Commission. But the earlier state-based system still had the
three features most needed to avoid US-style problems: it was
nationally consistent, it covered all consumer borrowers, and
it covered all lenders consistently, regardless of whether or not
they were prudentially supervised.
Another important mainstay against a US-style outcome is
that many Australian households actually pay their mortgages
down, often quite quickly. Estimates vary, but it seems as
many as half of owner-occupiers with mortgages pay down
faster than the contract requires. This is a welcome feature of
the Australian market that is rarely seen overseas. The faster
they pay mortgages down, the less likely they are to end up in
negative equity; they have a head start if prices should fall.
The international regulatory community is highly aware
of the role of lax lending practices in the US meltdown. In
response, the Financial Stability Board (FSB) has released
some global principles for sound mortgage lending practices,
which all countries should follow. The FSB principles
recognise that lending standards are multidimensional.
The focus should not be on maximum LVRs at origination,
ignoring all other aspects of lending standards; capacity to
service the loan is far more important.
If lenders were to ease lending standards beyond the point
of prudence they would not be doing anyone any favours.
Their customers, the borrowers, would be overburdened by
their debts. The firms themselves would face difficulties if loan
defaults were to rise. And financial stability would be much
harder to maintain. I am pleased to say that I do not currently
see signs of widespread lax lending practices here in Australia.
Indeed, APRA has been consulting with the boards of the larger
banking institutions about their housing lending standards.
But there will be times good times, when everything seems
rosy when lenders will find it hard to maintain the necessary
prudence. While the regulators can take actions and central
bankers like me can warn of the risks, in the end we all have a
stake in maintaining financial stability.
American households are less likely to pay their mortgages
down ahead of schedule than Australians. And trade-up
buyers seem to have high LVRs in the US; that doesnt
appear to be true in Australia. As a result, the US housing
stock is far more leveraged than that in Australia.
Barlevy G and JDM Fisher (2010) Mortgage Choices and
Housing Speculation Federal Reserve Bank of Chicago Working
Paper WP-2010-12.
Ellis L (2010) The Housing Meltdown: Why did it Happen in the
United States? International Real Estate Review, 13(3), pp 351394.
This article comprises edited extracts of two of Dr Ellis recent
speeches: Prudent Mortgage Lending Standards Help
Ensure Financial Stability (address to the Australian Mortgage
Conference 2012, Sydney, 23 February 2012, http://www.rba.gov.
au/speeches/2012/sp-so-230212.html) and Moderators Opening
Remarks for Panel Discussion on Mortgage Finance (Federal
Reserve Bank of Atlanta 2012 Financial Markets Conference, 11 April
2012, http://www.rba.gov.au/speeches/2012/sp-so-110412.html).
ROUNDTABLE
Buy-side
diversity
search spurs
US investor
engagement
US-BASED DEMAND
Davison In general terms how important is it for
the Australian securitisation industry to develop
offshore demand for its product especially from
the US?
BARRY Im sure issuers will agree that the Australian

market is not delivering everything they need. We have a
concentration of domestic investors in the banking sector
without a lot of real-money participation, so the need to
expand the non-core currency base has never been greater.
Clearly it is not the right time to tap Europe given the euro
crisis and regulatory disincentives. We can see what UK prime
issuers have achieved in the US and it makes absolute sense for
Australian securitisers to concentrate on the US.
The challenges the market faces will not be solved by a
single initiative. It will be a combination of factors: trying to
get greater domestic asset allocation in securitised product,
levelling the structural playing field, and accessing the offshore
investor base.
Davison What are US investors looking for in
residential mortgage-backed securities (RMBS),
and how do those preferences apply
to Australian product?
MCCUSKER Within the global cash portfolio at State Street

Global Advisors, for which I head the ABS credit research team,
we are predominantly looking for short-tenor, high-quality
assets. That means tenor inside two years and, generally,
triple-A paper. This is a change from where we were in the
pre-crisis years, where tenor could be as long as three to five
years. The change has come in because of the extension risk
experienced in the market and tighter 2a-7 rules.
Our fixed income group may have an interest in longer-
dated paper from offshore but predominantly we look at the
short end. We have participated in some Australian deals that
have come to the US market in recent times.
PAEZ The nature of our business gives us a different

perspective on tenor. We want to source assets that fund
liabilities from our insurance business, which results in
greater interest in the mid-to-long part of the curve. Also, the
void of issuance in the US domestic market from some of the
traditional securitised sectors is biggest in the three- to 10-year
part of the curve.
Regardless of tenor, we look at Australian RMBS as an
alternative to other structured assets globally. From that
perspective the key priorities for us are sound underwriting,
strong disclosure and transparency, a good track record and
attractive relative value. For the most part Australian RMBS
meets those criteria.
Davison Francisco Paez mentions the dearth of
supply in the US securitisation market. Is that
Australian securitisation market participants
say the domestic investor base, even if efforts
to widen participation succeed, needs to be
supplemented by a consistent offshore buyer
base. Long-term work with international
investors has started to produce dividends
in the form of US dollar issuance, but
understanding the specifics of US demand
will be key to the further development of
this vital distribution channel. National
Australia Bank (NAB) invited two US-based
investors to discuss these issues, along with
Australian issuers, at a roundtable discussion
hosted in Melbourne at the beginning of May.
PARTICIPANTS
John Barry Head of Securitisation NATIONAL AUSTRALIA BANK
Paul Garvey General Manager, Funding and Financial Markets ME BANK
Arkady Lippa Director, Securitisation NATIONAL AUSTRALIA BANK
Pia McCusker Managing Director and Head of Structured Credit Research
STATE STREET GLOBAL ADVISORS
Francisco Paez Director METLIFE
Andrew Twyford General Manager, Group Treasury NATIONAL
AUSTRALIA BANK
MODERATOR
Laurence Davison Editor KANGANEWS
19
the main driver of demand for offshore
product?
MCCUSKER A lot of our demand comes from

flight to quality, and I think many investors
are moving away from unsecured exposures to
financial institutions and, especially, from the
European banking sector.
Our clients want to add exposure to asset-
backed securities, having for some time been
shying away from the asset class. With the
Australian mortgage market they have learned
the lesson that, while there are risks, there is not
the same kind of principal loss experienced in US
sub-prime. I would describe our clients return to
participation in these markets as baby steps.
In the US we are seeing quite a lot of supply
in the auto-loan sector and a little in credit cards.
But that involves a degree of concentration risk so,
with our global presence, we have the expertise to
look at alternatives like Australian mortgages.
PAEZ Given the way we manage our structured finance

portfolio, we are constantly looking for ways to diversify or
further improve the quality of the portfolio, and Australian
RMBS can provide those types of opportunities. There is merit
to the product regardless of the supply void in the market.
Having said that, investors
are undoubtedly looking
aggressively for other sources
of assets because the product
void is massive. It will be a long
time before domestic issuance
gets back to pre-crisis levels.
There are sectors that were
clearly oversupplied, so in
some cases we may never get
back to those levels.
To my mind there is a
window of opportunity for
non-US issuers to come to this
market as a stable source of
funding. If issuers come to the
US with programmatic issuance
plans and make the effort to develop investor relationships, I
think they will achieve something positive for their funding
strategies. There are opportunities for offshore borrowers to
establish themselves as stable issuers in the US as we are
seeing in the case of a number of borrowers from the UK.
Davison What sense do borrowers and
intermediaries have about the sustainability of
demand for Australian paper from the US and
how important is the belief that the investor
base will be supportive over the long term?
BARRY We are trying to build the level of engagement. There

is a process of re-engaging with the US market weve had
some success but it is early days. Prior to the financial crisis
about half the volume of Australian RMBS issuance was going
offshore and a great deal of that was denominated in US
dollars, so many of the parties
we talk to are historical buyers
with the necessary level of
analytical capability and global
presence.
One interesting aspect is
around the UK master trust
structure. We get consistent
feedback from offshore
investors that there is a desire
to minimise extension risk
in structures. We have seen
the success of UK issuers
in tapping the US market,
particularly with short-end
2a-7 paper, through their
RMBS master trusts with bullet
and controlled amortisation tranches tailored to mitigate
extension risk.
Because of regulatory uncertainty surrounding a couple of
structural elements of master trusts they have not become a
feature of the Australian market. To create hard bullet tranches
of a reasonable thickness out of standalone closed vehicles
we have had to devise other structural techniques. To date,
that has meant a combination of re-issuance of short-dated
securities and facilities backing the redemption of notes. That
is working, but these structures are different from the master
trusts that many offshore investors are familiar with. It would
LEFT TO RIGHT: Andrew Twyford, Arkady Lippa, Paul Garvey, John Barry
AUSTRALIAN HOUSEHOLDS HAVE
TAKEN NOTE OF THE CHALLENGES
IN EUROPE AND THE US, AND ARE
UNDOUBTEDLY DELEVERAGING
THEMSELVES AS A CONSEQUENCE.
MORE OF OUR BORROWERS
ARE GETTING AHEAD OF THEIR
REPAYMENT SCHEDULES BY
MAKING GREATER-THAN-MINIMUM
PAYMENTS.
ANDREW TWYFORD NATIONAL AUSTRALIA BANK
ROUNDTABLE
certainly be preferable if we had the master trust technology
available to us.
GARVEY ME Bank has been quite lucky in that we have had

an established offshore programme we are a Securities and
Exchange Commission-registered issuing entity. We hold the
view that we need to diversify our funding sources, particularly
into offshore markets, which takes a lot of time and effort as
well as partnership with an investment bank to help us bring
deals to a market that has a
degree of complexity.
We most recently
roadshowed to US investors in
January 2012 and that gave us
a degree of comfort that there
was genuine interest in our
product. The investors that
participated in our book in
April worked alongside NAB
and ourselves to get to the end
outcome. This demonstrates
the willingness of investors to
engage with structuring over a
longer period than might have been the case in the past.
TWYFORD While the cost element of borrowing offshore

is, of course, a necessary ingredient in our thinking, NAB
looks at offshore funding as an important part of the overall
programme. Its important to have diversification in our
funding, and as an issuer of RMBS as well as covered bonds and
senior unsecured it is important for us to continue to do work
across asset classes.
Going forward, capability to execute matched funding
through asset-based issuance will be an important tenet of any
post-Basel III prudent funding plan.
LIPPA We have found that there

are a number of investors two
of whom are taking part in this
discussion who partner with
issuer and intermediary in the deal
process, which is fantastic. There
is also a broader group of investors
who only look at deals when they
are live. Thats why it is particularly
important for issuers to engage with
the investors who will support their
approach to the market: it gets them
to the point where they are able to
get the interest of the larger group of
investors.
Davison Andrew Twyford,
when NAB does investor
relations work in the US is
the bank talking to the same
investors about different asset classes or are
there discreet groups?
TWYFORD Its a blend. Some investors have a preference for

senior unsecured while others are happy to look at covered
exposure as well, or may prefer it. Having the opportunity to
hold non-deal roadshows at which we discuss a broad range
of opportunities tends to provide the greatest scope to get
maximum interaction.
MASTER TRUSTS
Davison John Barry
alluded to a US
investor preference for
bullet maturities in
RMBS, especially those
provided by master
trusts. How important
are bullets?
MCCUSKER Extension risk

has been a significant risk in
our portfolio. We understand
the better fundamentals in the Australian mortgage market
versus what happened in the US, but what happened to
extension risk particularly when the Australian Prudential
Regulation Authority made changes around call-date features
substantially changed our appetite.
As a result and I suspect this is the same for a lot of
investors in the same space as us we look to minimise
extension risk or not have it at all. That means our demand is
for bullet or controlled amortisation features.
What this entails is more homework on the originator
in terms of how it supports deals. In the UK the master trust
John Barry, National Australia Bank Paul Garvey, ME Bank
ONE OF THE REASONS INVESTORS
SOMETIMES PREFER COVERED
BONDS OVER STANDALONE RMBS IS
THE ADDITIONAL LIQUIDITY. I THINK
MASTER TRUSTS WOULD HELP WITH
LIQUIDITY AND IMPROVE PRICE
TRANSPARENCY.
JOHN BARRY NATIONAL AUSTRALIA BANK
21
format with the exception, of course,
of Northern Rocks Granite platform
has been successful in supporting
controlled amortisation.
PAEZ We think there is room for

both pass-through and bullet formats.
Pass-through structures, and the
contraction and extension risks you
run in them, are a part of the asset
class we participate in domestically.
Having said that, we see a
tremendous benefit in having a
master trust structure. It makes
issuance more efficient and economic,
and probably makes it more cost-
effective for issuers to come to offshore
markets more frequently by reducing
the cost of cross-currency swaps. From
our perspective as an investor, it is very
attractive to see issuers address
needs in different currencies
and different parts
of the curve. Without the
master trust structure that
is difficult to attain. We are
hopeful that a master trust
structure is approved and
adopted in Australia.
It is true that moving
to the master trust structure creates significantly greater
linkages with the RMBS sponsor than would be the case with
a standalone deal. From that perspective I dont think master
trusts are something that can be used wholesale by any
sponsor. But the larger and stronger sponsors would be very
successful using it.
LIPPA The harder the bullet, the lower the additional swap
cost. When you are talking about a controlled amortisation
or bullet structure created via a master trust that swap cost
reduction can be quite dramatic. For a cross-currency swap
provider who is able to price the extension risk of a swap that
attaches to a security with a scheduled but not hard-wired
amortisation profile, including soft bullets, the extent to which
they can rely on the defined schedule is the key variable in
pricing the swap.
Davison The deal ME
Bank did in April has a
US dollar-denominated
tranche with a bullet
maturity. What
advantages does the
master trust structure
have that make it more
appealing than a bullet
RMBS, or a covered
bond?
PAEZ It may be a question

better answered by the
borrower, but we assume it
would be more efficient from a
structuring standpoint to use a
master trust than to structure
a standalone bullet. Both accomplish a similar outcome,
though in the case of a master trust investors are relying on
the sponsor to make the bullet work while it is likely to be the
structural features that support a standalone bullet.
There are also a lot of similarities between master trusts
and covered bonds. Having a segregated pool as the sole
source of repayment removes the complexity of a number of
the contractual stipulations needed in covered bonds. That
adds some attractiveness to the RMBS product. But really they
are sufficiently similar that it would be a relative value call
between the two.
Davison The ability to offer master trusts
certainly appears to have supported the success
of UK RMBS issuers in
the US. What would
that facility do for
Australian borrowers?
BARRY Master trusts are

very valuable for the discussed
reasons of efficiency and
flexibility. I dont think they
are a cure-all for the Australian
issuer market, though. They
Arkady Lippa, National Australia Bank Andrew Twyford, National Australia Bank
THERE IS A WINDOW OF
OPPORTUNITY FOR NON-US ISSUERS
TO COME TO THE US MARKET AS A
STABLE SOURCE OF FUNDING.
FRANCISCO PAEZ METLIFE
OUR CLIENTS ARE DISPLAYING
APPETITE FOR ADDING EXPOSURE TO
ASSET-BACKED SECURITIES, HAVING
FOR SOME TIME BEEN SHYING AWAY
FROM THIS ASSET CLASS.
PIA MCCUSKER STATE STREET GLOBAL ADVISORS
ROUNDTABLE
wont do a lot for non-bank issuers, because of the linkage
to sponsor issue and also because a significant degree of
overcollateralisation is typically required for the sponsor to
get the full benefits that a master trust can offer. It is also fair
to say they are unlikely to offer much to Australian regulated
entities that are seeking capital relief in RMBS.
One of the reasons investors sometimes prefer covered
bonds over standalone RMBS is the additional liquidity. I think
master trusts and their ability to build deep lines of stock
would help with liquidity and improve price transparency.
Time to market is also a key advantage of master trusts.
Using a master issuer platform means sponsors can respond
very rapidly to favourable market conditions. Given the credit
market volatility that weve seen, being able to take advantage
of a window of opportunity or respond to a reverse enquiry
without the need to set up a new vehicle each time, can be
critical.
Overall, I believe master trusts would be a very important
development for the Australian market. As an industry, we
are talking to regulators about them and there is a degree of
optimism that we can get traction on the issue.
On the issue of efficiency and cost for the issuer, if we look
at the bullet structure in ME Banks SMHL deal the relevant
area is the redemption facility. That would not be required in
order to offer a bullet maturity out of a master trust. And on
the swap side, the extent to which there is certainty around
principal repayments certainly helps manage pre-payment risk
and, as a result, contain the cost of cross-currency swaps.
LIPPA Thats exactly right. What ME Bank created in its last

deal was in effect a proxy master trust. If the bank had the
ability to use a de-linked master trust facility it would not have
incurred the additional costs and it would be able to issue
bonds across a range of maturities all in US dollars, if so
desired. There is the flexibility and speed to tap the market at
any time out of master trusts, at any tenor and in any currency
depending on where the issuer sees pockets of demand. Once
its running it is a very efficient funding tool.
There is certainly a lot of interest in the structure in
Australia, on the issuer and intermediary sides, and also
for mortgages and, potentially, other asset classes too. The
interesting thing is that, although there may have been some
regulatory uncertainty around master trusts, they certainly
havent been explicitly prohibited in Australia they have
just never been taken up. One reason may be that Australian
investors have never really familiarised themselves with the
structure, but encouragingly we are now seeing momentum
building across the industry.
Davison What do Australian issuers think about
master trusts?
GARVEY Getting a master trust structure established is an

important development. It provides a degree of flexibility
in transactions that takes several months to complete in
standalone format as our recent issue proved. There are also a
range of different tenors in which investors are interested and
the master trust structure provides a degree of flexibility to
meet specific demand.
TWYFORD It takes the complexity out of structuring. ME Bank

was successful at putting together its structure but there was
a degree of complexity that Im sure would have challenged
some investors. Having the ability to offer what ME Bank did
via a master trust platform would have given that bond a
much easier path to market. Having the ability to use master
trusts would be a significant fillip to the market. Anything that
can add flexibility and reduce complexity will help us develop
the investor base for this product.
LIPPA In the last NAB RMBS deal in 2011 there was also a
US dollar tranche, with a two-year soft bullet maturity. That
carries an element of increased extension risk that master trust
issuance largely does not have. Again, it would add to investor
certainty and reduce swap costs.
GARVEY I think the industry is in an interesting position.

There are investors who want alternative structures and we
as issuers have to come up with solutions to that demand.
I believe a lot of issuers are perfectly capable of issuing
amortising structures but Im not sure enough effort is going
into looking at alternatives. Perhaps the time commitment
is a step too far for some issuers. But there is certainly a shift
by investors to seek alternative structures and to engage with
issuers about these structural alternatives in advance of a
securitisation deal.
Davison The added complexity of doing cross-
currency swaps on principal pass-through, as
WE UNDERSTAND THE BETTER FUNDAMENTALS IN THE
AUSTRALIAN MORTGAGE MARKET VERSUS WHAT HAPPENED
IN THE US, BUT WE LOOK TO MINIMISE EXTENSION RISK OR NOT
HAVE IT AT ALL. THAT MEANS OUR DEMAND IS FOR BULLET OR
CONTROLLED AMORTISATION FEATURES.
PIA MCCUSKER STATE STREET GLOBAL ADVISORS
23
Subordinated sales likely a long-term goal
Davison How realistic are the
prospects of finding offshore
investors for Australian
mezzanine and subordinated
RMBS tranches?
MCCUSKER I am not in that space but
I think in all likelihood where the
ratings agencies are with lenders
mortgage insurance (LMI) and
counterparty assessments makes
it difficult for mezzanine investors
if they are at all ratings sensitive.
Changing methodologies mean
you dont know whether you are
buying a single-A bond that will be
double-B the next minute because
LMI was downgraded without any
consideration to the structure.
PAEZ From our perspective there
is nothing in the concept of
junior tranches that would be an
impediment to participating. It is
a learning process for investors to
start buying Australian product, and
we certainly want to be able to walk
before we run. Once investors get
to know the market well they are
more likely to be willing to explore a
wider range of options.
I dont see why we would not
look at that kind of investment
further down the road, though
it would really be a question of
structuring. Ratings volatility is
an issue, although we are not
terribly ratings sensitive in our
case it is more about fundamental
analysis as we dont have ratings-
based mandates. Lower credit
enhancement also makes Australian
product more challenging, but again
theres no reason this cant be
resolved through some element
of structuring.
GARVEY I think it remains quite a
challenge to sell lower-rated tranches
outside Australian dollars, given the
pre-payment risks for the swap and
the consequent cost and volatility for
the cross-currency hedge.
Domestically we have found that
there is beginning to be more interest
in lower-rated tranches from non-
traditional investors. For our latest
transaction we had direct enquiry to
us and actually placed bonds directly
with self-managed superannuation
funds and high net worth individuals.
Those sources of liquidity might in
the past have come through funds
management channels, but they
are now going through alternative
avenues to make direct investments.
Davison Does this imply that
Australian borrowers would
be better advised to direct their
efforts to finding new domestic
investors in junior tranches
rather than looking offshore?
LIPPA Yes, that makes sense for
domestic investors and some of the
offshore buyers who are comfortable
with Australian dollars, and potentially
for regions other than the US. The
disclosure requirements of US dollar
issuance mean that if a borrower
found a US dollar subordinated or
mezzanine bond buyer they would
likely have to offer it in 144A or SEC
registered format, and that increases
the workload quite dramatically. An
Australian dollar offering in Reg S
format would be more likely to work
for domestic and offshore investors.
BARRY Domestic demand for
mezzanine and subordinated
tranches remains concentrated
among quite a small group of buyers,
although we are continuing to try
to expand that buyer base. It is
definitely a worthy cause to try to tap
into offshore investors but I think it
will be a challenge. In the end it will
be investors who are comfortable
with the underlying pools and the
quality of the servicer, and who have
formed a view on the sufficiency of
the first loss and the benefit of LMI,
who participate.
In the recent Pepper Australia
non-conforming transaction we were
able to sell specialist loan-backed
paper, without LMI, to offshore
investors right down the capital
structure to single-B notes. That gives
us some cause for optimism, though
there are clearly still challenges.
RECENT PLACEMENT OF AUSTRALIAN RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) INTO THE US
HAS ONLY INVOLVED THE HIGHEST-RATED TRANCHES OF DEALS. WHILE INVESTORS IN THE US ARE NOT
OPPOSED TO SUBORDINATED NOTES IN CONCEPT, A DEGREE OF ADDITIONAL FAMILIARITY WITH AUSTRALIAN
PRODUCT IS LIKELY NEEDED BEFORE DEMAND EMERGES FURTHER DOWN THE CAPITAL STRUCTURE.
The disclosure requirements of US dollar issuance
mean that if a borrower found a US dollar
subordinated or mezzanine bond buyer they would
likely have to offer it in 144A or SEC registered
format, and that increases the workload quite
dramatically. An Australian dollar offering in Reg S
format would be more likely to work for domestic
and offshore investors.
ARKADY LIPPA NATIONAL AUSTRALIA BANK
ROUNDTABLE
opposed to bullet, securities has been mentioned.
How much of a challenge is that?
TWYFORD It depends on the structure of the individual

bonds: straight amortising, controlled amortising or
bullet. Amortising structures add complexity, and these
days complexity can equal cost. If you are issuing a pass-
through structure with a requirement for a full of balance-
guaranteed swap it will be much tougher to make it
economic in todays environment.
Thats why the work that has been done by the likes
of NABs debt capital markets team, to build the market
offshore by clever use of soft and hard bullets and controlled
amortisiation, allows hedging work in the most efficient
possible form. That is a very useful approach for issuers.
BARRY We have established that there is demand in the

US for Australian RMBS across a range of maturities. More
recently, we have focused on money-market accounts with
one-year bullets because the arithmetic does not work for
longer maturities a function of the credit spread to Libor, and
also because of the cost of the swap. The element of that cost
that is growing in significance is the inherent swap provider
downgrade risk and the associated collateral requirements
that the swap provider has to price for.
Davison How much of a challenge is the reduced
credit quality of banks globally, in terms of the
availability of swap counterparties?
BARRY That puts the Australian banks in quite a strong

position thanks to their good credit ratings. But issuers are
dealing with fewer and fewer counterparties, which is probably
negative from an execution standpoint.
GARVEY It is useful to work with a bank, as was the case with

NAB on our last deal, which provides a whole-of-transaction
solution. That includes both the deal structure and the swap
Swapping one challenge for another
Davison What are the issues
for cross-currency swaps on
amortising RMBS deals?
AARONS There are four key
components: pre-payment risk,
contingent funding value adjustment
(FVA), credit risk and extension risk.
We quote the four charges separately
to give full price transparency.
Pre-payment risk exists even in
scheduled-amortisation trades and,
especially, in pass-through trades.
We have done quite a bit of work on
pre-payment and tranche modelling
to get a good handle on the extent of
the risk, both on the underlying RMBS
and on the derivative overlaying it.
Understanding the expected future re-
hedging cost is critical. Two of the key
drivers of this are the expected pre-
payment trajectory and the expected
pre-payment volatility.
The new rating agency downgrade
clauses which drive the contingent
FVA charge or NABs expected
cost of posting collateral if the bank
is downgraded is also a significant
factor. Its not just the mark-to-market
value of the swap which needs to
be posted, but also a hefty volatility
buffer. Many of our competitors,
who are closer to ratings triggers,
will have to charge a lot for that while
we believe we have a competitive
advantage as an AA- rated bank.
Having said that, innovative structures
can substantially mitigate this cost.
The potential extension risk if
there is a call feature in the underlying
notes is something we have to price
very carefully but there are some
innovative ways of structuring step-
ups which can reduce upfront cost.
Davison Why is it cheaper for
Australians to issue US dollar
RMBS with shorter tenors?
AARONS There are several factors: the
steepness in the credit premium as
a function of term, the steepness of
the bills/Libor spread curve and also
the fact that the shorter the term, the
less pre-payment-driven swap
re-hedging there is likely to be.
Davison How have you been
able to assist Australian
borrowers with swap cost?
AARONS We like to see ourselves as
solution providers, working with the
client to assess various tranche and
swap structure options to optimise
the outcome. We are not just here
to execute! We have implemented
a number of innovative structures,
including NABs own RMBS issue in
2011, which have materially reduced
the cost compared to traditional
approaches.
Davison What is the likely
impact of new derivatives rules?
AARONS There are a lot of issues
around regulatory capital for risk.
Central clearing also has implications.
But I think it is the rating agencies as
much as the regulators that have a big
say in the securitisation swap market:
they are driving the downgrade criteria
and that is a big driver of the FVA
component of swap cost.
CROSS-CURRENCY SWAP EXECUTION FOR AMORTISING RESIDENTIAL MORTGAGE-BACKED SECURITIES
(RMBS) TRANSACTIONS IS HELPING KEEP AUSTRALIAN ACTIVITY IN THE SHORT END. MARK AARONS,
NATIONAL AUSTRALIA BANK (NAB)S HEAD OF DERIVATIVES SOLUTIONS, EXPLAINS THE MAIN ISSUES.
25
side. Some banks can provide
one of those but not the
other, and I think it will be
a competitive advantage for
the intermediaries who can
provide both.
AUSTRALIAS
ECONOMY
Davison Australian
borrowers say the
questions they are most
commonly asked by
global investors in
addition to ones about
Australias offshore funding reliance and ties to
China are about the housing market. Do US
investors worry about the Australian housing
market, especially the fact that it has yet to
experience a large correction?
MCCUSKER Naturally we monitor the headline news about

issues like the commodity boom, the two-tier economy,
concentration in the banking system and reliance on wholesale
funding. Those risk factors are undoubtedly out there, but we
also look at the fundamentals of origination and underwriting
in Australia that have stood up over time.
The risk is a jump in defaults caused by a significant
change in house prices or unemployment, but even that is
offset by the amount of dry powder the Australian government
has at its disposal. Public debt to GDP is among the lowest in
the world and 10-year bond yields are still very comfortable,
so there are sufficient mitigants to any concerns that I am
comfortable having RMBS exposures in Australia.
PAEZ I agree with all those points. When you look

at house prices in Australia for the first time it is
somewhat shocking how expensive they are compared
with many other economies, on an absolute basis at
least. When you consider what happened with home
prices in the US, the UK and other places there is
clearly a very different trend line for Australia. But
looking beneath the surface you start to see reasons
for the differences: the Australian market is driven
much more by structural factors than by speculation
or loose underwriting.
Davison To what extent can good mortgage
underwriting standards offset economic
shocks?
PAEZ If you look at the levels of loan-to-value ratios

(LVRs) on Australian mortgage loans they are nowhere
near what we see in some other developed markets.
That provides tremendous shock absorption capability,
which makes the Australian
mortgage market much more
resilient to housing price
corrections.
MCCUSKEROne thing that

took me by surprise when I
did due diligence in Australia
was the extent of claw-back
features established on
brokers commission in the
event of a borrower starting to
deteriorate. The regulation of
the mortgage market is a huge
plus, certainly compared with
the US.
Davison What comparisons would US investors
make between the credit quality of RMBS
product they are offered from UK issuers and
Australians? One issue that has been raised
is Australian products lower levels of credit
enhancement.
PAEZ Credit enhancement is obviously a key component

of any analysis and it is markedly lower, at least as a starting
number, in Australian product than it is in the UK equivalent.
There are mitigants, though: the turbo structure where there is
sequential pay until a significantly higher credit enhancement
target is reached is certainly helpful, as is the double
underwriting provided by lenders mortgage insurance.
MCCUSKERThe revolving nature of the mortgage pool

underlying master trusts demands additional credit
enhancement. Those pools will have more mortgages with less
seasoning than a standalone trust, which is why the latter can
offer lower enhancement.
INVESTORS WANT ALTERNATIVE
STRUCTURES AND WE AS ISSUERS
HAVE TO COME UP WITH SOLUTIONS
TO THAT DEMAND. I BELIEVE A LOT OF
ISSUERS ARE PERFECTLY CAPABLE OF
ISSUING AMORTISING STRUCTURES
BUT IM NOT SURE ENOUGH
EFFORT IS GOING INTO LOOKING AT
ALTERNATIVES.
PAUL GARVEY ME BANK
Arkady Lippa and John Barry, National Australia Bank
ROUNDTABLE
Davison What feedback do issuers get from the
US about Australian credit?
GARVEY It doesnt vary too much from what we have just

heard. There are some economic challenges domestically
but Australia is well positioned to deal with them, and the
feedback we received at our January roadshow was very good.
The mitigants that have been discussed such as low
arrears, low LVRs and conservative lending guidelines have
been important themes that have come out in our investor
engagement. The regulatory and legal framework in Australia
is also regarded as important, and it has aided our reception
in offshore jurisdictions to have rules like recourse back to
mortgage borrowers.
TWYFORD There is a good level of understanding

throughout the globe given the access investors have to
information and analysis, and the opportunities they have
to speak with issuers. I expect investors in the US, Europe
and Asia would have had the chance to speak to numerous
Australian financial institutions and those that choose to do
so will hear fairly consistent information.
The fundamentals in Australia remain strong. It is
important for Australians to continue to repeat the message
that there are key distinguishing factors in our marketplace
that have allowed us to be in the position we are in now. It
is not all by fluke that the Australian mortgage and secured
lending markets have performed so well over the crisis-
period.
BARRY It is true that there has been a recurring question

over recent years about Australian property prices and
whether they are set on course for a correction. It is the
Regulation and reporting in a cross-border world
Davison How important are
Dodd-Frank and other regulatory
changes when US investors look
at offshore securitisation?
PAEZ We have to see what the
final regulations related to Dodd-
Frank look like. A lot of what is in
the law regarding securitisation is
investor protection, for instance the
risk-retention rules. We are seeing
issuers out of Australia already
retaining significant risk, so from that
perspective they already meet one
aspect of the Dodd-Frank Bill. But
overall, I think we need to wait and see
what the final regulations will be.
BARRY One question we have been
asked is around whether the market
needs more or less regulation. The
Australian regulatory environment has
proved very effective throughout the
crisis era, with the conservative stance
of the local regulators serving us well.
The challenge is around the
sheer volume of regulatory change
and the difficulty engendered by the
uncertainty involved. Im sure the
market will adapt to new regulation,
but ideally what we need is more
regulators harmonisation between
Australian and international rules.
We certainly want to avoid a
situation like the one that has occurred
in Europe where regulations are biased
against securitisation product and in
favour of covered bonds.
Davison Is it particularly
challenging to be in a country
like Australia which will take
a regulatory lead from larger
global markets?
LIPPA Thats exactly right, and on a
number of fronts. Although some
of the new regulatory regimes have
already become effective, in many
cases we dont know what the final
version of US or European rules will
be. And there is also the Australian
domestic piece including skin-in-
the-game requirements which are
still emerging. It is a real challenge
for issuers to operate in this kind of
environment.
BARRY The concern would be if there
is a disincentive to issue into the US
because, for example, the final Dodd-
Frank rules make it overly difficult for
Australian issuers to comply and have
no mutual recognition of Australian
regulation. Were optimistic that a
sensible outcome will be achieved, but
we will have to see how that plays out.
Davison What are the
complexities of structuring
RMBS to include both US and
Australian dollar tranches?
GARVEY The complexities are cross-
jurisdictional. There is often no
uniformity from investors on what
information they need. The jurisdictions
that are more advanced on the
regulatory front are clearer, but for
those with regulation change still in
progress the information demands
from investors are less consistent.
LIPPA In the case of ME Banks April
deal it was almost like running two
separate transactions: one offshore
and one domestic. Differing disclosure
requirements as well as time zones
and market conventions, of course
have always been there but they
THE ISSUES OF NEW REGULATION AND INVESTOR REQUIREMENTS FOR DEAL DISCLOSURE ARE CHALLENGES
EVEN FOR RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) TRANSACTIONS ISSUED AND BOUGHT WITHIN
A SINGLE JURISDICTION. THE COMPLEXITIES OF CROSS-BORDER DEAL FLOW ADD TO THE TASK THOUGH
THERE IS A DEGREE OF COMFORT THAT THERE ARE NO INSURMOUNTABLE ISSUES.
27
have become much more challenging
because they now cover a broader
range of factors.
GARVEY One of the challenges we
found on the deal was that, being
one of the first to re-engage with
US investors and under significant
regulatory change, we were trying to
navigate a legal interpretation without
established market conventions. That
was quite difficult.
Davison What do US-based
investors expect in terms of
disclosure and reporting in
RMBS, and how do Australian
issuers match up to these
expectations?
PAEZ When we are looking at
Australian RMBS transactions many,
if not most, issuers are willing to
provide loan-level information on the
underlying pools. That certainly helps
us get a good sense of the nature
of the collateral and to uncover any
layered risk that isnt necessarily
shown in summarised information.
In general, Australian issuers are
pretty open to working with investors
and providing the information we look
for. There is also a good standard of
ongoing information.
In terms of areas where I would
like to see more information, ideally I
would like to see all disclosure made
available through mechanisms that
help standardise the process rather
than doing it on an investor-by-investor
basis. On an ongoing reporting basis
it would be helpful to see information
delivered through some of the cash
flow modelling platforms more widely
used around the globe.
There is still some work to be done
in terms of reporting, but I certainly see
willingness from Australian issuers to
work with investors on these.
GARVEY There is a time and cost
commitment involved in structuring
deals to meet investor demand, and
standardisation of disclosure and
reporting across jurisdictions would
improve the situation. Engaging
directly with investors helps to get
a greater understanding of investor
expectations, but this could vary
across the range of investors.
Once we know the disclosure
requirements and investor needs, we
are happy to accommodate them.
MCCUSKER We worked with UK issuers
to ensure their modelling of deals
was in Intex as it is important for
us to have that. We want to ensure
that Australian transactions are also
modelled accordingly in Intex.
fundamentals that we talk about: we have a fully-priced
market and high household leverage, but we are also
experiencing strong population growth. There isnt an
oversupply in the market in general, and where there is like
south-east Queensland there has been correction.
With the US in particular we have spent a lot of time
educating investors on the differences between our mortgage
market and theirs. That includes themes like the full-recourse
nature of Australian loans, the fact that our loans are non-tax
deductable which encourages rapid repayment and the
fact that we have not had the decline in lending standards
experienced in the US. The feedback from US investors is also
that they are very comfortable with Australian regulation.
LIPPA There is also a perception that Australia has a high-

quality banking system, which is extremely helpful and,
from our perspective, well-deserved! Offshore investors
appear to welcome the involvement of Australian banks
in deals as mortgage underwriters or as support facility
providers. In the flight-to-quality environment that has
emerged in recent times Australian issuers have been able to
benefit from this.
TWYFORD Australian households have taken note of the

challenges in Europe and the US, and are undoubtedly
deleveraging themselves as a consequence. More of our
borrowers are getting ahead of their repayment schedules by
making greater-than-minimum payments, which gives them
a greater buffer should additional pressures emerge. That
puts the Australian property market in a stronger position,
and offers the potential to cushion any short-term slowdown
in the economy.
When we are looking at Australian RMBS transactions many,
if not most, issuers are willing to provide loan-level information
on the underlying pools. That certainly helps us get a good sense
of the nature of the collateral and to uncover any layered risk.
In general, Australian issuers are pretty open towards working
with investors.
FRANCISCO PAEZ METLIFE
CO-PUBLISHED
FEATURE
LESSONS FOR
THE AUSTRALIAN
SECURITISATION
MARKET FROM
THE PERPETUAL
LITIGATION
I
n December 2010 Perpetual Trustee Company (Perpetual)
successfully reached agreement with Lehman Brothers
Special Financing (LBSF) and BNY Mellon Corporate
Trustees (BNY) to end the well-publicised litigation
between them concerning notes issued as part of the
Dante credit-linked note programme. More than a year after
that settlement, other Dante noteholders remain in litigation
to enforce their rights.
The Perpetual litigation has significant implications for
the Australian securitisation market, particularly given the
extent to which the Lehman Brothers group was embedded in
Asia and the Pacific and the prevalence in structured finance
transactions of the flip clauses at issue in the litigation. This
article considers the practical lessons that can be taken from
the Perpetual proceedings.
BACKGROUND TO THE PERPETUAL LITIGATION
On 13 May 2009 Perpetual commenced proceedings against
BNY in the English High Court to enforce the rights of retail
Two of the partners at Sidley Austin who
acted for Perpetual Trustee Company
discuss the implications of the companys
litigation against Lehman Brothers
and BNY Mellon for the Australian
securitisation market.
BY SIMON FAWELL AND ROBERT J. ROBINSON
investors in Australia, New Zealand and Papua New Guinea
who held Dante notes, for which BNY acted as trustee.
The Dante programme was sponsored by the Lehman
Brothers group and the notes, issued by numerous special
purpose vehicles, were backed by an ostensibly safe, liquid
investment security and by collateralised credit default swaps
with LBSF. Many Dante note issues were originally assigned
credit ratings higher than those of LBSF.
Although the transaction documents were expressed to
be governed by English law and conferred jurisdiction to the
English courts, LBSF launched its own proceedings against BNY
before the US Bankruptcy Court for the Southern District of
New York (the US Bankruptcy Court), which is the first-instance
forum for the Lehman Brothers bankruptcies in the US. Later
on the same day it voluntarily joined the Perpetual-BNY
proceedings in England. Perpetual was never joined to LBSFs
case against BNY in the US.
Separate proceedings were later brought in England by the
Belmont Noteholders, a further group of Australian holders of
Dante notes. The Belmont Noteholders claim proceeded before
the English courts in tandem with Perpetuals claim.
LBSF commenced separate proceedings in the US
Bankruptcy Court in respect of the Belmont Notes, but those
proceedings were judicially stayed. The Belmont Noteholders
moved for withdrawal of the case from the US Bankruptcy
Court in February 2012 and, as recently as April 20 2012, LBSF
filed its brief in opposition to such withdrawal. The purpose of
the Belmont Noteholders application to withdraw appears to
have been to accelerate appellate review of the US Bankruptcy
Courts ruling that flip clauses violate US bankruptcy law.
FLIP CLAUSES DISPUTED
The key question in the litigation was the validity of so-called
flip clauses under English law and US bankruptcy law. The
relevant clauses provided for a reversal (flip) of the priority
of payments between LBSF, as swap counterparty, and
noteholders under a standard waterfall provision upon the
occurrence of a swap default for which the swap counterparty
was the defaulting party.
Absent such occurrence, LBSFs claim on the collateral
would rank in priority to any noteholders claim but, following
any such occurrence, the claim of noteholders would rank
in priority. Such a default had occurred under the swap as
a result of, among other things, the bankruptcy filing of
LBSFs parent company and, later, LBSFs own filing in the US
Bankruptcy Court.
LBSF argued in England that the flip clause was ineffective
as a matter of English law as it offended the anti-deprivation
rule, which seeks to prevent the improper deprivation of
assets from an insolvent debtors estate on bankruptcy. Before
the US Bankruptcy Court, LBSF contended that the flip clause
offended the US Bankruptcy Codes automatic stay, as well as
the codes prohibition against ipso facto clauses (i.e. contract
29
provisions disadvantaging a bankrupt debtor by virtue of the
fact of its bankruptcy).
First the English High Court
1
and then the English Court
of Appeal
2
determined that the flip clauses did not offend
the anti-deprivation rule and so were enforceable. The US
Bankruptcy Court, however, determined
3

that the flip clauses
were unenforceable as they violated both the automatic stay
and the prohibition on ipso facto clauses.
This disparity in judicial rulings created a conflict for BNY
because it was unclear how the decisions in England and the
US would be reconciled, despite preliminary court-to-court
communications.
The decision of the US Bankruptcy Court was eventually
appealed and, following encouraging comments from the
appellate judge when granting permission to appeal, Perpetual
was able to negotiate a settlement with LBSF and BNY.
The Belmont Noteholders did not, however, agree
settlement terms with LBSF and BNY and, although they have
since obtained a judgement of the UK Supreme Court
4
that the
flip clauses are enforceable under English law, they have yet
to receive a distribution of the collateral due to the conflicting
position under US bankruptcy law. The Belmont Noteholders
continue to pursue litigation in the US in an effort to obtain
a judgement overturning the US Bankruptcy Courts adverse
ruling on the flip clause.
LESSONS FOR THE AUSTRALIAN
SECURITISATION MARKET
The collapse of Lehman Brothers has provided a stark reminder
that no enterprise is free of insolvency risk and that no
market is an island, sheltered from the risk of participants
being entangled in complex cross-border litigation in other
jurisdictions.
Transaction parties must therefore give full consideration
at the outset of a deal to the possibility of insolvency events
and their ramifications and also to where pertinent matters
may be litigated.
The Perpetual litigation has highlighted the potential
gravitational pull of the US Bankruptcy courts and their
assertion of jurisdiction over disputes with insolvent,
internationally-active debtors even in the face of both
contracts expressly governed by English law and subject
to the jurisdiction of the English courts, and English court
proceedings which had already been commenced to adjudicate
the same issue.
Although it is possible that a route will be found through
the conflicting judgements, it appears that significant
further effort will be required of the Belmont Noteholders
before such a path can be found. Both the US Bankruptcy
and English courts were careful to decide only the position
on enforceability under their respective laws, without
determining which law would govern in the event of a conflict.
If the decision of the US Bankruptcy Court is not overturned
and no settlement is reached in the Belmont case, the
respective courts will need to make a decision on primacy.
It is crucially important in such a setting to be prepared
for counterparty insolvency, as decisions will need to be made
quickly that will shape the strategy for dealing with the default
both in restructuring or settlement negotiations and in the
courts. In particular, being able to act swiftly may allow a
party to seize jurisdiction in the forum most favourable to it.
Although proceedings were later commenced by LBSF in the US
SEP 16 2008 Lehman Brothers Holdings Inc les for Chapter 11 bankruptcy protection in the US.
OCT 3 2008 LBSF les for Chapter 11 bankruptcy protection in the US.
DEC 1 2008 Early termination notice served by Saphir in respect of the swap with LBSF, linked to the Perpetual notes.
MAY 13 2009 English proceedings commenced against BNY by Perpetual.
MAY 20 2009 LBSF voluntarily joins English proceedings.
MAY 20 2009 US Bankruptcy Court proceedings relating to Dante notes held by Perpetual commenced against BNY by LBSF.
JUN 9 2009 English proceedings commenced against BNY by Belmont Noteholders.
JUL 28 2009 Judgement of the English High Court in Perpetual and Belmont cases, ruling that the relevant flip clauses were enforceable.
NOV 6 2009 Judgement of the English Court of Appeal conrming the July 28 2009 judgment of the English High Court.
NOV 24 2009 Recognition of LBSFs US bankruptcy proceedings as foreign main proceedings under English law.
JAN 25 2010 Decision issued by Judge Peck of the US Bankruptcy Court in LBSFs case against BNY, ruling that ip clauses are unenforceable.
SEP 14 2010
US Bankruptcy Court adversary proceedings relating to Dante notes and similar securities held by (inter alia) Belmont Noteholders
commenced against BNY (among other trustees) by LBSF.
SEP 26 2010 US District Court appellate Judge McMahon provides an indication favourable to Perpetuals position.
DEC 2010 Perpetual agrees settlement with LBSF and BNY.
JUL 27 2011
Judgement of the UK Supreme Court conrming the 2009 decisions of the English High Court and English Court of Appeal in the
Belmont case.
FEB 17 2012 Belmont Noteholders move to withdraw LBSFs US adversary proceedings against BNY relating to their Dante notes.
PERPETUAL LI TI GATI ON TI MELI NE
SOURCE: SI DLEY AUSTI N MAY 2012
CO-PUBLISHED
FEATURE
Bankruptcy Court, Perpetuals position was helped by the fact
that proceedings were already underway in England, where the
finding was likely to be favourable.
To act effectively following a default, it is equally important
for a party to have a working knowledge of the status of
the collateral and also key transaction terms including
enforcement and termination provisions. In order to enforce
its security, it was necessary for Perpetual to follow a precise
sequence of steps to ensure that it was at all times working
within the transaction documents confines.
As has been seen from many other cases arising from the
Lehman Brothers collapse, failure to follow precise contractual
terms when enforcing a security or terminating a derivative
transaction can be fatal to the ultimate claim. Likewise, action
in cross-border litigation that is untimely, or that betrays
unawareness of procedural requirements at each point in time,
can undo even the best of underlying factual positions.
Finally, it is essential that parties be proactive in assessing
and enforcing their rights. Perpetuals position was improved
1. Perpetual Trustee Co Ltd v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc: Belmont Park Investments Pty
Ltd & Ors v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc [2009] EWHC 1912 (Ch); [2009] 2 BCLC 400.
2. Perpetual Trustee Co Ltd v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc: Belmont Park Investments Pty Ltd
& Ors v (1) BNY Corporate Trustee Services Ltd (2) Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160; [2010] Ch 347.
3. Lehman Brothers Special Financing Inc. v. BNY Corporate Trustee Services Limited (Lehman Brothers Holdings, Inc.), 422 B.R. 407 (Bkrtcy.,
S.D.N.Y. 2010).
4. Belmont Park Investments PTY Limited (Respondent) v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc
(Appellant) [2011] UKSC 38; [2012] 1 AC 383.
Simon Fawell and Robert J. Robinson are partners in
the London and New York offices, respectively, of Sidley
Austin LLP. Sidley Austin LLP acted as solicitors of record
for Perpetual Trustee Company Limited in the English
litigation described in this article. Views expressed in this
article are exclusively those of the authors and do not
necessarily reflect those of the firm or its partners.
significantly by the fact that, in promptly proceeding against
BNY in the English courts, it took the initiative both before
LBSF commenced proceedings in the US and before LBSFs
bankruptcy proceedings were formally recognised in England
(the latter giving rise to a stay on the commencement of
litigation against LBSF in England). The favourable results
achieved by Perpetual provide a bright counterpoint to the
protracted battle in which other businesses and investors have
found themselves caught up.
Third edition of ASJ to be published

in October 2012
To register your interest in receiving a copy of the ASJ or to discuss sponsorship opportunities,
please contact Brydie Wright bwright@kanganews.com +61 2 8256 5566
AS
The ASJ is the ofcial bi-annual magazine commissioned by the Australian Securitisation Forum (ASF) and
published by KangaNews. Issue 1 was published in November 2011. The current issue will be distributed
at Global ABS 2012 in Brussels in June, as well as bespoke events in Asia arranged by the ASF. The magazine
also has a targeted mailing list to securitisation investors and other market participants around the globe.
Issue 3 will be published in October 2012. It will be distributed at the ASFs annual conference in Sydney, the
American Securitization Forums annual conference in January 2013, and the targeted mailing list.
31
Q+A
GREG TANZER
COMMISSIONER, AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
H
ow is ASIC building
condence in the
securitisation
markets?
One element of
ASICs focus on
confident and informed investors is
gatekeepers. They play an essential
role in the functioning of our financial
system. Investors depend on a host of
gatekeepers in the securitisation sector
such as credit rating agencies, trustees
and auditors.
ASIC has required gatekeepers to
hold an Australian Financial Services
(AFS) licence since January 2010.
In December 2011 ASIC released
an information sheet that specifies
new reporting requirements for rating
agencies. If they operate in Australia
they must lodge an annual compliance
report with ASIC. This will assist ASIC
in monitoring compliance with AFS
licence conditions, including the
mandatory obligation on rating agencies
to comply with IOSCOs Code of Conduct
Fundamentals for Credit Rating Agencies.
The changes to rating agency
regulation are aimed at better
managing the inherent conflicts of
interest in these firms and improving
the quality of credit ratings.
What are your key domestic
priorities regarding securitisation?
ASIC has been working in a number of
key areas in relation to securitisation
markets, including:
Implementation of G20 principles and

objectives
1
.
Co-chairing the IOSCO Task Force on

Unregulated Financial Markets and
Products (TFUMP) together with the
French AMF.
Working with the peak industry body,

the Australian Securitisation Forum
(ASF), to develop securitisation standards.
What are your priorities at an
international level? How is your
work with fellow regulators through
IOSCOs TFUMP developing and
how are you managing the process
of international harmonisation in a
way that will not be detrimental to
the Australian market?
It remains a priority of TFUMP to
encourage the recovery of securitisation
markets in a robust and sustainable way.
Australia is an active participant in these
regulatory developments and we remain
committed to these processes.
We will continue to consult with
industry as TFUMPs work develops
and we encourage industry efforts to
improve transparency through the
development of their own disclosure
and reporting standards.
Now that the ASFs residential
mortgage-backed securities (RMBS)
disclosure standards have been
approved and implemented, in your
view should they be given regulatory
backing?
ASIC supports the work of the ASF in
implementing its RMBS disclosure
standards, and we understand that
the ASF is suggesting to industry that
compliance with the standards should
be by July 1 2012.
ASICs chairman, Greg Medcraft,
spoke at the ASF conference last
November and noted that he was a
strong supporter of self-regulation and
industry standards are critical in terms
of complementing regulation. We are
interested in industrys views on the
buy side and the sell side as to whether
they believe regulatory backing is
needed or appropriate.
One critical issue ASIC has
been addressing is the alignment
of investor and issuer interests.
Are you satised with progress
on this front?
ASIC has been closely monitoring
international regulatory changes with
regard to risk retention or skin in the
game, and we are conscious of the need
to ensure Australias regulatory regime
is consistent with these changes to avoid
regulatory arbitrage.
TFUMP made the recommendation
for risk retention in its report released
in September 2009, where it stated that
regulators should consider requiring
originators and/or sponsors to retain
a long-term economic exposure to
securitisation in order to appropriately
align interests in the securitisation value
chain. TFUMP continues to monitor
regulatory developments in relation to
risk retention practices.
We believe implementation of any
risk retention requirements in Australia
would need to be risk-sensitive and have
regard to the quality of the underlying
collateral.
1. The G20 commitment was: Securitisation sponsors or originators should retain a part of the risk of the underlying assets, thus encouraging them to act
prudently. This originated from a recommendation made by TFUMP in September 2009.
Together with the Commonwealth Treasury, the Reserve
Bank of Australia (RBA) and the Australian Prudential
Regulation Authority (APRA), the Australian Securities and
Investments Commission (ASIC) makes up the council of
regulators in Australia. Greg Tanzer, commissioner at ASIC,
outlines the commissions work in the securitisation sector.
SPOTLIGHT ON ASIC
D
o you foresee
any progressive
developments in
the makeup of the
committed liquidity
facility (CLF) over
time or will the initial version of the
programme be maintained unless
and until external developments
make a change appropriate?
We have clearly established the eligible
collateral for the CLF, which includes
government bonds and paper from
supranationals and other foreign
governments, as well as debt and asset-
backed securities, including residential
mortgage-backed securities (RMBS),
issued by authorised deposit-taking
institutions (ADIs).
For the purposes of the CLF, the
RBA will also allow banks to present
certain related-party assets such as self-
securitised RMBS. There are a number of
reasons for this decision, but the primary
motivation is to reduce the systemic risk
of excessive cross-holdings of bank-issued
instruments. In terms of how much
internal RMBS can be used, that will be
the Australian Prudential Regulatory
Authority (APRA)s call. The information
is now all out there and banks will
negotiate their CLFs with APRA.
Regarding the development of the
CLF, the only scope for broadening
is if new products emerge. If new
instrument classes come along, in due
course they will be considered. Covered
bonds, for example, are eligible,
although APRA still needs to come to a
determination as to whether they are
level two assets, which will be done
when the asset class is a bit bigger.
Do you anticipate the CLF will
have any impact on the established
repo system?
No. Everything which is currently repo
eligible with us is included in the CLF.
With the birth of a new asset class coinciding with significant
regulatory change regarding the liquid assets Australias
banks can hold, the securitisation market is staring down the
barrel of significant change. Guy Debelle, assistant governor,
financial markets at the Reserve Bank of Australia (RBA),
discusses the advent of covered bonds and how securitisation
will slot into the funding mix for Australian banks in a
changed regulatory environment.
Given the ratings decline of
a number of signicant global
sovereigns, has any thought been
given to revising ratings standards
for repo eligibility in any asset
classes?
The impact of sovereign downgrades has
only been at the margin with regard to
repo-eligible assets: only a few names
have been affected. Consequently, we
dont see any need at this stage to change
our repo-eligibility criteria. We have just
reviewed this and we are comfortable
with our position. We arent going to
chase issuers down the rating scale.
What does the development of
the Australian covered bond market
mean for the bank funding mix for
regional and major institutions?
The relativities in pricing between
unsecured and covered bonds and RMBS
have been broadly maintained over the
last six months. They have moved up and
down together, so the market has a set
idea of where the relativities should lie.
I anticipate covered bonds will be
mostly used as an offshore funding
tool by eligible banks primarily
the majors as they tap a particular
niche of investors. RMBS will become
the primarily domestic securitisation
vehicle.
We anticipate that banks will not
issue covered bonds right up to the 8
per cent cap level they will leave some
buffer zone.
Covered bonds are contributing to
the funding mix by enabling issuers
to term out their funding. The covered
product is generally between five and
10 years in maturity while RMBS is
focused on three years, so the new asset
class provides a real opportunity for
maturity diversification.
In terms of the regional banks, they
are reasonably well positioned. We
may start to see covered bond issuance
from some of these issuers and they
will continue to use the securitisation
market. Last year the non-major banks
NAVIGATING REGULATION:
THE CENTRAL BANKS VIEW
Q+A
33
were able to execute two to three deals
each and they are on track to do the
same again this year. The size of the
recent ME Bank RMBS deal demonstrates
the appetite for these names.
Regional banks have the ability to
be opportunistic about their issuance
and we expect to see them do so. Many
second-tier RMBS issuers really ramped
up their deposit funding in 2011, so
they technically dont need to issue
senior unsecured. As a result, RMBS is
a tool they can use when they want to.
However, issuers without a balance sheet
as a source of funding are likely to face
some challenges.
To what extent will covered bonds
affect the overall cost of funding for
Australian banks?
Even if issuance reaches the absolute
regulatory cap of 8 per cent, covered
bonds wont be enough to make a
material difference to overall funding
costs. There are many other inputs
into the cost of funding that are more
significant. And any pricing gain
obtained from issuing covered bonds
is likely to be offset to some extent by a
demand from unsecured debt holders for
more compensation in the future. I see
the role of covered bonds as primarily
broadening the potential investor base
rather than a means of reducing overall
funding costs for banks.

How comfortable is the RBA
with the quality of the collateral
underlying RMBS?
We have to be mindful of arrears rates
on mortgages because it is collateral
we sometimes hold as part of our repo
facility. We monitor arrears through
our middle office and we have no
concerns around collateral at this stage.
Arrears rates have been going sideways
for some time now.
The major banks have done a lot
of work to maximise the component
of wholesale funding they raise in
AUD in recent years. Do you think
the RBA or other independent bodies
should provide incentives to guide
banks funding mix?
In terms of product selection, if not
the onshore-offshore currency split,
the liquidity coverage ratio and the
net stable funding ratio recommended
by Basel III provide incentives to term
out, for example. While denomination
of funding isnt a priority here,
these dynamics definitely affect the
composition of funding by incentivising
long-term funding and deposit funding.
But really a range of forces works to
shape funding composition, apart from
Basel III including pressure from the
market. So banks had already started
down this path prior to Basel III. With
all these forces working together, there
is no real need for any more official
incentives.
In November 2011 the Reserve

Bank of Australia (RBA) and the
Australian Prudential Regulation
Authority (APRA) announced details
of the committed liquidity facility
(CLF) that forms part of Australias
implementation of the Basel III
liquidity reforms.
The Basel liquidity standard
requires that banks have access to
enough high-quality liquid assets to
withstand a 30-day stress scenario,
and specifies the characteristics
required to be considered an
eligible liquid asset.
The CLF provided by the central
bank against eligible collateral to
enable banks to meet the liquidity
coverage ratio (LCR) addresses
the issue of the marked shortage
of high-quality liquid assets that
are outside the banking sector
in Australia due to low levels
of Commonwealth and state
government debt.
APRA will work with the banks
to determine their overall liquidity
needs, and will allow banks to
reach an agreement with the RBA
for a CLF for a specified amount,
subject to RBA approval, to enable
them to meet the balance of their
liquidity requirement under the
LCR. APRA may ask banks to
specify the size of their access to
the CLF as much as 12 months in
advance. The facility will only be
available for banks to meet that part
of the liquidity requirement agreed
with APRA.
The RBA has set a fee of 15 basis
points in return for its commitment
to provide liquidity to a bank under
the CLF. The fee will be paid on
both the drawn and undrawn
amounts.
Basel III implementation
and the CLF
GUY DEBELLE
RESERVE BANK OF AUSTRALI A
I see the role of covered bonds as
primarily broadening the potential
investor base, rather than a means of
reducing overall funding costs for banks.
ROUNDTABLE
RMBS in the
Australian
domestic
market: making
sense of relative
value and
liquidity
COVERED BOND IMPACT
Davison Has the arrival of covered bonds
fundamentally changed the RMBS issuance and
investment environment for the long term?
MAIDMENT From our perspective covered bonds are

another arrow in the funding quiver. I dont think they have
supplanted either RMBS or senior bond issuance. Around
a quarter to a third of our outstanding total debt can be in
covered bond format but not more than that. So we will
continue to be a senior issuer and we will continue to be an
RMBS issuer.
In terms of the programme of funding we have undertaken
in 2012, there was an emphasis in the first quarter on covered
bonds. That was partly driven by the fact that we are in a
ramp-up phase for that programme, which enabled us to do
a higher-than-ordinary proportion of our funding in covered
bond format.
It was also driven by the fact that we are trying to manage
the overall cost of funding through a period of quite dislocated
markets with wide spreads. As spreads recover, our propensity
to do trades further out the curve and more trades in senior
format or RMBS for that matter increases.
Looking back to January the cost of doing US dollar senior
unsecured debt for an Aussie bank was 275 basis points over
bills, and thats just not palatable. So I certainly would not
write off the RMBS market based on the activity covered bonds
drew in the first quarter in fact I think it was an unusual
quarter. Thats true from the issuer and the investor sides.
For instance, while we thought a covered bond market
would emerge in Australia we were pleasantly surprised by
the extent to which the investor base accepted the product. I
also think that was a function of spreads at the time. A lot of
the feedback from last year was that investors wouldnt buy
covered bonds because they thought the spreads would be too
narrow.
BRUNTON I think Simon Maidment is right: it felt at the back

end of last year a lot like the post-Lehman environment, where
the funding market was shut and spreads were extremely
volatile and widening. The secondary market relies so much
on primary printing and the discipline that gives, so it was
useful to kick-start the market again by the arrival of the new
asset class.
We were of a mind that covered bonds would be used
more offshore than onshore by Australian issuers. But the
levels we saw at the turn of the year, for a triple-A asset, were
very attractive. On the other side, for AMP Capital that pricing
somewhat dislocated the way we think about senior unsecured
and RMBS assets.
What does that mean now, with covered bonds at 115-120
basis points over bills? I dont think covered in the longer
term crowds out RMBS, but maybe it has for the short term as
investors get a better handle on the relative liquidity that is
Commonwealth Bank of Australia (CBA)
invited Australian issuers and investors to
join a roundtable discussion to review trends
in the domestic residential mortgage-backed
securities (RMBS) market. In Australia these
securities are nding their place in a market
that has been shaken by price volatility and
the arrival of covered bonds. The credit quality
of the product has stood up well and issuers
across the nancial institution spectrum say
they expect RMBS to continue to have a role.
For the buy side, adding certainty around
liquidity is the key issue.
PARTICIPANTS
Jeff Brunton Head of Credit Markets AMP CAPITAL
Peter Casey Deputy Treasurer ING BANK AUSTRALIA
David Hanna Senior Portfolio Manager
MACQUARIE FUNDS MANAGEMENT
Peter Hendry Head of Global Markets Institutional Sales, Fixed Income
COMMONWEALTH BANK OF AUSTRALIA
Simon Maidment Head of Group Funding and Execution
Ben McCarthy Head of Structured Finance, Asia Pacific FITCH RATINGS
Justin Mineeff Senior Vice President, Corporate Finance Securitisation
Chris Plater Chief Investment Officer CHALLENGER LIFE
Patrick Tuttle Managing Director and Chief Executive PEPPER AUSTRALIA
MODERATORS
Robert Verlander Head of Corporate Finance Securitisation
Laurence Davison Editor KANGANEWS
35
available in covered bonds, senior unsecured
and RMBS. In the second quarter we have
been a bit unimpressed with liquidity in
all the asset classes, compared with 2010
and 2011.
Specifically, while I think liquidity
in covered bonds and senior unsecured
is acceptable, the liquidity issue is most
apparent in RMBS. Back in 2010 and 2011
we thought we had an asset class that was
tradeable, but if we try to move even modest
parcels of RMBS today we have to face the
fact that it is a brokered market. The liquidity
that is offered for small parcels is 10-20 basis
points back from where the primary market
is trying to set levels.
HANNA Covered bonds provide another

instrument that investors can use in the
high-quality space. The investment decision
will be based on the best relative value offered
between covered bonds, senior bank paper and RMBS.
Liquidity risk will be a large driver. The liquidity premium
as a percentage of the total risk premium offered on securities
is at heightened levels and it has been for some time. We
assess how much of that total risk premium is related to
liquidity premium and allocate to securities accordingly, in
tune with the underlying liquidity we are expected to have in
individual mandates.
RMBS are great value if you dont require liquidity.
Senior bank paper probably provides the best return-liquidity
trade off because it provides more yield than covered bonds,
although covered bonds tend to be the most liquid of the
three securities.
Davison Do you think the RMBS liquidity
situation is heightened because there has been
a lack of primary issuance?
BRUNTON It could be, but the longer that stays the case the
more it puts a big question mark over liquidity. There are
also some unanswered regulatory questions around how
RMBS may be treated within banks liquid assets facilities
and I think that could be preventing answers to those
liquidity questions.
PLATER Another aspect is that structurally there is a big

difference between a multi-billion dollar bullet bond, which is
what a covered bond is, versus an amortising RMBS. The RMBS
is also likely at a discount right now so youre probably taking
much of it on the basis of pre-payment rates as well as the
credit of the mortgage provider. Perhaps those are reasons why
the asset class is less liquid once securities reach the stage of
being part of a seasoned transaction.
TRANSACTION RESPONSE
Verlander Peter Casey, ING Bank was the rst
issuer of prime RMBS in Australia this year.
What are your thoughts on the outcome of
the transaction?
CASEY Before the deal we were certainly wondering exactly

what the impact of covered bonds would be. That was in terms
of discovering the overall flavour of the market and whether
we would be able to get investors attention. Similarly, we had
to consider the price level certainly covered bonds came to
the Australian market at levels a lot wider than we expected,
and that had repercussions for all funding instruments.
As the market settled down and the spreads on covered
bonds tightened, we were very pleasantly surprised at the
FROM A LEAD MANAGER PERSPECTIVE WE WANT
PARTICIPATION IN RMBS FROM FUND MANAGERS AS WELL
AS FINANCIAL INSTITUTIONS. HOWEVER, WE ALSO FEEL
THE MARKET CAN BE TOO QUICK TO JUDGE A DEAL BY A
PERCEPTION OF A LACK OF FUND MANAGER INVOLVEMENT.
ROBERT VERLANDER COMMONWEALTH BANK OF AUSTRALIA
ROUNDTABLE
take-up on our RMBS. There certainly seem to be investors
who continue to have good appetite for this asset class and
to differentiate it from covered bonds. Obviously the risks are
different. But when the yield is higher than they could get on
covered bonds they are happy to take the trade-off.
We had seven new investors to our programme in the
deal, so certainly there is still demand. They may have been
investors who predominately bought major bank RMBS
paper and came to us because there hasnt been much major
issuance. We were very happy they came to our programme,
but there has only been one prime deal subsequently so
the test will be over the course of the year. If there is A$15-
20 billion (US$14.9-19.9 billion) of RMBS still to come, the
question will be how that finds a home.
Verlander How signicant was it that ING Bank
offered a very simple RMBS structure?
CASEY Part of the feedback was that we should make sure

there was no reason for investors not to buy the issue, as far as
we could. We kept the structure simple with straightforward
collateral, we engaged investors well in advance to make sure
we had a good-sized book, and we had a good idea of where it
would price.
VERLANDER From a lead manager perspective we want

participation in RMBS from fund managers as well as
financial institutions. However, we also feel the market can
be too quick to judge a deal by a perception of a lack of fund
manager involvement. This can be a double-edged sword
because bank investors in particular are very knowledgeable
about bank credit and RMBS, and to some extent they can get
comfortable at a lower spread.
From recent deals I note that there is a push and pull in
terms of getting a book together, where there is a temptation
to ask the issuer to engage at a higher spread and by doing
that attract a wider range of investor engagement. However,
on the other side of that there is a fairly reliable base of
financial institution investors that is happy to pay a relatively
tight price.
CASEY I think that is fair comment. Having said that, the bulk
of the money in RMBS deals at present comes from authorised
deposit-taking institution (ADI) investors. It is true that by
paying another 5 basis points we may have got a little bit more
and that by paying another 25 points we may have got an extra
10-20 per cent to the trade,
but we have to put the
banks interests first.
Verlander Is there
anything about deal
books that issuing
banks have seen
recently, especially for
covered bonds, that is
fundamentally new such as new investors or
bigger tickets?
MAIDMENT The Australian dollar market is a closed market

with three investor bases: domestic institutional investors,
domestic banks and international investors. Looking at the
Medallion RMBS transaction CBA did last year, we were
incredibly pleased with the book, including the fact that we
had two-thirds real-money distribution. Comparing that to the
covered bond we did in January, the proportion was about the
same.
Those are A$3-3.5 billion transactions, and from my
perspective they both had good, well-distributed, well-
diversified investor bases, which is one of the objectives we
are trying to achieve while also trying to manage cost. We are
not going to pay a substantial premium to attract a particular
incremental investor base if that involves materially affecting
the cost of funds to the bank.
Covered bonds help in the sense of accessing secured-
product investors who want bullet payments. In our
experience, that is probably more influential with the
offshore Australian dollar investor base, because there is still a
reluctance to take pre-payment risk into a lot of those offshore
Australian dollar portfolios. In that context I am talking about
central bank investors and institutional Australian dollar
money offshore. In terms of the overall covered programme,
issuing in foreign currency is bringing in new investors that we
wouldnt ordinarily see in our senior unsecured issuance.
STRUCTURES AND SPONSORS
Verlander Patrick Tuttle, as a non-conforming
RMBS originator what are your expectations for
being able to secure funding for the mortgage
product that Pepper Australia (Pepper)
originates?
TUTTLE We are in the market right now, bringing a non-

conforming RMBS deal. So we have live experience, and the
feedback we have had has been extremely positive. We were
last in the market in December 2010 so we think new Pepper
issuance is overdue.
What helped us is that we had a lot of reverse enquiry
that has come from the mezzanine investors interested in the
more junior tranches of the capital structure; we tranche our
BEING A NON-CONFORMING OR
SPECIALIST LENDER MEANS WE CAN OFFER
INVESTORS A LOT MORE MARGIN ON THE
UNDERLYING LOAN PORTFOLIO AND STILL
ACHIEVE EFFICIENT FUNDING.
PATRICK TUTTLE PEPPER AUSTRALIA
37
deals right down to single-B
rated notes. We are one of
only a handful of non-bank
issuers in Australia who
can issue non-conforming
RMBS, and we have built
up demand having called
all our outstanding Pepper
Residential Securities (PRS)
deals since the beginning of
the financial crisis including PRS6 in December last year and
PRS7 in early March 2012. We gained confidence, off the back of
that enquiry, that investors recognise our track record of calling
all our deals hence the decision to bring PRS9 to market.
The demand we are seeing is all coming from real-money
investors. The encouraging part about our new deal is that
we will also be able to remove the redemption facility that
we had on our PRS8 issue investors this time seem happy to
buy the junior triple-A tranches without a redemption facility
backstop, which is positive for our sector. I should stress that
there is nothing wrong with a redemption facility, but Id
rather see a simple, traditional structure without the need for
bank balance sheet support. What we are offering is a fairly
straightforward structure and the demand has been good.
Being a non-conforming or specialist lender means we
can offer investors a lot more margin on the underlying loan
portfolio and still achieve efficient funding. So we can go to
market thinking realistically about spreads relative to prime
RMBS and still get an efficient deal done.
The other pleasing aspect of our PRS9 transaction is the
level of initial interest coming from offshore. We dont feel
covered bonds are crowding out our part of the RMBS market.
Verlander Chris Plater, are the sort of assets
Patrick Tuttle describes the kind you are
looking for?
PLATER Our mandates are such that we can be predisposed

to lending in less liquid fixed income. We look to provide
capital where there is a lack of it, and we see that this is very
much the case for non-conforming structures. Prime, bank-
originated RMBS obviously has a reasonable level of support,
and generally speaking there is a relatively liquid market
for the securities which is reflected in their pricing. Non-
conforming is a much more specialised asset and there is a
lot more to get comfortable with in terms of the issuer, the
collateral and the structure. This lends itself to investors who
are set up to develop that comfort.
HANNA From our perspective non-conforming is more

sensitive to the economic cycle, and therefore will struggle
in times of stress. As an asset class typically originated by
non-banks, it is the most challenged part of the market. It
doesnt have a natural fit in bank balance sheet portfolios and
lacks natural support from the Australian Office of Financial
Management. However, this environment means that some
of these issues come to market with strong structures and
attractive pricing.
Davison It has been suggested that, in the
prime sector, it may be tempting for issuers to
offer more in spread to bring in additional real
money. But the ability of mortgage pools to pay
a clearing margin has been limited. How close is
the market now from margins being at a level
where investors are tempted to come in to RMBS
deals regularly?
BRUNTON I would be surprised to learn that the prime

mortgage origination world is not still profitable. Is there
a problem underwriting mortgages at the current cost of
liabilities versus the standard variable mortgage rate?
CASEY The point is at what stage the coupon on the RMBS,

going down the structure, cant be supported by the cash
coming in.
BRUNTON Our view is that the subordinated section of the

capital structure looks like high-yield risk rather than the
current ratings quality it gets badged with by some agencies,
though they are all in varying stages of updating their
WE HAVE LOST A LARGE SWATHE OF OFFSHORE INVESTORS
AFTER THE IMPACT OF THE FINANCIAL CRISIS ON GLOBAL
ASSET-BACKED DEMAND, BUT EVEN IN TERMS OF THE
DOMESTIC MARKET IT IS DIFFICULT TO SEE WHY THERE ISNT
MORE DEMAND FOR THIS PRODUCT.
SIMON MAIDMENT COMMONWEALTH BANK OF AUSTRALIA
IF LIQUIDITY IS THE CORE REQUIREMENT,
RMBS IS NEVER GOING TO MEET IT
BECAUSE ITS NOT DIRECTLY FUNGIBLE
BETWEEN TWO DIFFERENT DEALS; EACH
ONE HAS TO BE UNDERWRITTEN.
CHRIS PLATER CHALLENGER LIFE
ROUNDTABLE
methodologies. A 400-450 basis point spread, subordinated
RMBS tranche is getting to a level where its somewhere similar
to taking the equity risk premium on the first-loss piece to
a bank despite the fact that it also has lenders mortgage
insurance (LMI) on the pool.
At the prime, triple-A level RMBS is still competing in a
high spread environment. We have very wide levels on senior
debt from financials, with US and European banks national
champions at 200-300 basis points over bills in the front
part of the yield curve. For me to attract money I have to offer
an end yield to my clients that can persuade them to switch
out of term deposits. To the extent that term deposits are
effectively senior debt offering a 5.5 per cent coupon, if I am
trying to create a reason to move into an actively-managed
bond fund, another asset at 100-130 basis points over swap
isnt compelling.
MAIDMENT But there is still a huge amount of cash that

doesnt appear to be getting recycled issuers are calling
deals, so investments are getting repaid. Im sure analysis
would reveal that the net outflows from this sector, given
Making sense of solvency
Verlander Much work is
being done in Europe around
solvency II. Ben McCarthy,
what are Fitch Ratings (Fitch)s
views on the product mix in an
environment that appears to
favour covered bonds?
MCCARTHY Regulation is a significant
issue for structured finance and is
certainly having a significant impact
on the issuance and investment
allocations between securitisation and
covered bonds around the world. Like
Basel III in the bank sector, solvency
II is designed to protect insurance
companies from failure by attributing
different capital weights to different
products. Given Fitch estimates the
insurance sector to be 20 per cent of
the European investor base for new
issues, any negative impact it has will
have flow on effects on Australian
markets.
A Fitch report on solvency II
highlights the significant differences
in capital weights under solvency II
pertaining to holders of securisation or
covered bond investments for firms
using the standardised approach.
For the same rating and duration,
a securitisation transaction under
solvency II can attract more than 10
times the capital of a covered bond or
corporate exposure.
The relevance in Australia is both
that Australian issuers are issuing into
European markets but also that the
local insurance regulator will be looking
at such regulatory developments
and may set up similar provisions in
Australia.
There is a lot of talk in Europe
around the view that the incentives are
now based on the idea that structured
finance is a bad thing and covered
bonds are good even when the
underlying collateral can be identical.
As a credit rating agency our view is
solely on credit risk and we are able to
achieve the same ratings conclusion on
both asset classes.
Verlander Could solvency
II effectively kill the RMBS
market in the UK? As an
insurer you would, perversely,
be better off buying loans in
whole-loan format than buying
rated RMBS.
MCCARTHY All things remaining equal,
its true that solvency II could have a
significant impact on asset allocation
but it wont necessarily kill RMBS.
First, insurance companies which will
be governed by solvency II are only
a portion, albeit a large one, of the
investor universe. Secondly, it may
force other outcomes such as a push
for insurers to improve internal systems
to get off the standardised approach,
because once they are able to use
their own data they have the ability
to align the capital weights between
securitisation and other products.
One of the challenges more broadly
is that structured finance has earned a
stigma over the last four years or more
THE EUROPEAN RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) MARKET APPEARS TO BE UNDER
THREAT FROM A REGULATORY APPROACH THAT GIVES FAVOURABLE TREATMENT TO COVERED BONDS OVER
SECURITISED PRODUCT. AUSTRALIAS APPROACH IS A WORK IN PROGRESS.
RMBS IS INTERESTING IF I CAN SELL IT AT THE LEVEL AT
WHICH I BOUGHT IT. IT DOESNT MAKE A LOT OF SENSE IF I BUY
SOMETHING WHEN I KNOW THE BID IS IMMEDIATELY GOING TO
BE 20 BASIS POINTS BACK.
JEFF BRUNTON AMP CAPITAL
39
and that has taken time to resolve. We
see the market working through that
now and, on the positive side, we have
seen a gradual increase in the volume
of questions asked of Fitch in Australia.
This has to be a positive for Australian
RMBS as if covered bond investors
become familiar and comfortable with
Australian mortgage markets it may
lead them back to RMBS over time.
PLATER Ben McCarthy makes an
interesting comment on the relative
value of covered bonds versus RMBS.
The 20 per cent overcollateralisation
number is, as a far as I understand it,
something of a mirage. In fact, its more
like 5 per cent, and all of that comprises
uninsured mortgages. As I understand
it, as a bank is downgraded the
requirement for collateral is reduced,
which entails real overcollateralisation
of more like 5 per cent.
MCCARTHY Covered bonds and RMBS
are very different products and have
different credit profiles. A covered
bond is much more like a corporate
bond in that its composition evolves
over time as conditions change
with changing assets, issuance and
overcollateralisation levels. There are
provisions in covered bond legislation
and legal documentation to protect
covered bond investors, and the level
of overcollateralisation, as a bank
gets downgraded, but this will differ
between programmes. Investors need
to get comfortable with the possible
evolution of the credit quality of a
covered bond just as they do with
corporate or bank evolving credit
quality.
BRUNTON What you see in places in the
world where theres a lot of distress,
like in Spain, is that the asset classes
can merge back together quite quickly.
I still believe that if there were just
a few shocks in house prices or in
delinquencies, covered bonds would be
more resilient than RMBS.
Mineeff Regarding the
pass-through nature of
RMBS in a Basel-compliant
world, how does the asset-
liability match prole issuers
get from RMBS weigh on their
decision about what to issue?
CASEY It has certainly smoothed out
our refinancing profile. I wouldnt say
matching is the major consideration
but it definitely helps a lot that
management and the board, as well
as the local regulator, feel that RMBS
allows for a better match. We want to
have as many tools as we can and that
is one of the advantages of RMBS.
There is a lot of talk in Europe around the view that the
incentives are now based on the idea that structured nance is
a bad thing and covered bonds are good. From our point of view
credit risk is the most important factor.
BEN MCCARTHY FITCH RATINGS
the modest amount of issuance there has been, must be
enormous. We have lost a large swathe of offshore investors
after the impact of the financial crisis on global demand for
asset-backed securities (ABS), but even in terms of the domestic
market it is difficult to see why there isnt more demand for
this product.
BRUNTON Im sure some of it is to do with the underweight

of bonds in self-managed super funds, which are now the
biggest sector of our superannuation industry. We thought
pension trustee allocations had low weights at 25 per cent
fixed income, but self-managed superannuation is more like
4 per cent. The way rate cuts are going to perhaps rebalance
the ability of fixed income managers to offer attractive yields
relative to term deposits could allow flow back in.
What we have been saying for the last year or two is that
covered bonds were a stepping stone to find a way to fund
the households of Australia not only their current level
of debt but also for growth. What we come back to is how
the industry should be thinking about how to make RMBS
more homogeneous with covered bonds. I think covered
bonds have provided some inkling into demand attracting
a bigger buyer base by removing credit risk from the table to
some extent.
Mineeff Is it possible that the homogeneity Jeff
Brunton refers to could be assisted by the ability
to issue RMBS out of master trusts, giving
investors a more bullet-type security that is
clearly a lot easier in terms of the discussions
around pre-payment?
PLATER We are reasonably comfortable with the current state

of structures. Having said that, it would be interesting to see
what would happen in Australia, as master trusts address
a number of issues with static pools though they also
introduce their own complexities.
HANNA The potential to provide some homogeneity through

using a master trust is beneficial. That said, when such large
coupons are on offer extension risk is not a major concern.
And Im doubtful whether the homogeneity offered by master
trusts would remove all liquidity issues.
ROUNDTABLE
The key is increasing secondary market liquidity and the
ability to offer liquidity which is challenging in this industry
when brokers have reduced balance sheet availability. I expect
that the availability of master trusts in Australia would not
have a material effect on liquidity.
RELATIVE VALUE AND LIQUIDITY
Verlander Jeff Brunton, from your perspective
when does RMBS become a compelling buy?
BRUNTON Its interesting if I can sell it at the level at which

I bought it. It doesnt make a lot of sense if I buy something
when I know the bid is immediately going to be 20 basis points
back. It is ridiculous to have relativities that I have to move
paper even small amounts at 160 basis points over bills
when the primary is coming in at 140 basis points over.
We have to remember there are a number of mandates
that went into this asset class. When the market started
dislocating in 2008, some of our clients asked how they could
access the wide spreads, so the consultants said to buy RMBS.
That meant entry points were about 175-250 basis points over
swap. What we are hearing from those channels is that they
are disappointed they cant get out, and that payout has been
slower so what do they do now?
MAIDMENT Were those secondary market purchases from the

re-import of securities?
BRUNTON Yes. But what it means is that clients are now

seeing the RMBS asset class as one that requires an illiquidity
premium. I think, longer term, the market will be fine and
RMBS will trade inside senior unsecured and somewhere
close to covered, as it should. But to get there we need more
liquidity in the secondary market.
Davison Could a degree of additional tightening
hide a multitude of sins in that regard? If
the market got to a point where there was
more ability for RMBS pools to offer spread,
there could be potential to offer that illiquidity
premium while the secondary market improves.
BRUNTON That could be a path. If covered bonds keep coming

in to 90 basis points over bills or similar and RMBS is out
there looking attractive, and the secondary starts to pick up
again, we might start to get some trades.
MAIDMENT Creating more end-user demand for the product

is key. At the end of the day, dealers only put prices on the
securities they think they can reasonably recycle into the
market. The fact that you cant get a bid on RMBS is a function
of trading desks feeling they cant move that paper to someone
else within a reasonable time within the bid-offer spread.
HENDRY It is more intensive for intermediaries to make sure

they know where the pay-downs are. Its like looking down a
line of train cars: you have to look at the covered bond and
look at the senior unsecured, and one can either trust that
information or go somewhere else for it.
MINEEFF We can work around that in some ways, but there

are still deficiencies in that the buyer and seller are likely to
have a different view on pre-payment risk. It comes back to the
issue of pre-pay ability.
PLATER I agree with that. The 100 per cent senior unsecured
market has proven to be probably the most liquid bond asset
class outside government and semi-government bonds in
Australia. I have no doubt that it will continue to be more
liquid, while RMBS will never be as liquid as either the senior
unsecured or sovereign markets. If liquidity is the core
requirement, RMBS is never going to meet it because its not
THERE SEEM TO BE INVESTORS WHO CONTINUE TO HAVE GOOD
APPETITE FOR RMBS AND TO DIFFERENTIATE THE PRODUCT
FROM COVERED BONDS. OBVIOUSLY THE RISKS ARE DIFFERENT.
BUT WHEN THE YIELD IS HIGHER THAN THEY COULD GET ON
COVERED BONDS THEY ARE HAPPY TO TAKE THE TRADE-OFF.
PETER CASEY ING BANK AUSTRALIA
IT SEEMS POSSIBLE THAT THE HOMOGENEITY OF RMBS AND
COVERED BONDS COULD BE ASSISTED BY THE ABILITY TO ISSUE
RMBS OUT OF MASTER TRUSTS, GIVING INVESTORS A MORE
BULLET-TYPE SECURITY THAT IS CLEARLY A LOT EASIER IN
TERMS OF THE DISCUSSIONS AROUND PRE-PAYMENT.
JUSTIN MINEEFF COMMONWEALTH BANK OF AUSTRALIA
41
OFFSHORE DYNAMICS
Verlander Simon Maidment,
was the ability to do
such successful trades as
Commonweath Bank of
Australias covered bonds
reective of the fact that
Europe is a larger, more
developed market that
maintained liquidity around
yield curves, whereas with
RMBS there is much less of
all those factors?
MAIDMENT In Europe covered bonds
are clearly much better understood
and better followed than RMBS.
Banks in Europe dont get liquidity
credit for buying Australian bank-
issued covered bonds, so we dont
see large participation from bank
investors in our euro issuance. What
we get is a real-money, institutional
investor and pension buyer base
that could be considered the same
kind of buyer base we would be
targeting with double-A minus, senior
unsecured issuance.
That is not really a buyer base that
has historically participated in Australian
RMBS as a relatively short-dated pass-
through security structure doesnt suit
their underlying fund liabilities. The
missing link is being able to do longer-
dated, bullet-type bonds to meet the
needs of this investor group. Master
trust structures are part of the solution.
There is strong interest in Australian
mortgage collateral from offshore
investors. They understand that
collateral because Australian banks
have issued senior unsecured forever
and a day, and the bottom line is that
60 per cent of our balance sheets
are mortgages. We have also issued
RMBS in foreign currencies in the past,
so people have understood the quality
of Australian RMBS credit product.
The real issue is how we can give
global investors RMBS in a format that
suits their investment needs. Foreign
currency and bullet-payment bonds
out of master trusts would potentially
open up a wider investor universe.
However, at the moment it is totally
uneconomic for us to issue foreign-
currency RMBS despite the fact that
qualitatively there is a lot of demand.
The world is short of issuers of high-
quality paper at the moment. Investors
would like exposure to the asset
class, its just that the cost of funds is
uneconomic.
Davison Is that just a product
of the basis swap?
MAIDMENT It is a combination of
factors. First, there continues to be
compelling triple-A RMBS issuance
from the likes of UK and Dutch banks
that is priced at much wider spreads
than makes sense for Aussie RMBS
given the relative strength of the
collateral and services. Secondly, the
basis and pre-payable cross-currency
swaps are very expensive. Again,
master trust structures would provide
some potential relief here by reducing
cross-currency pre-payment risks and
costs.
Verlander Have any new
jurisdictions of demand
interest emerged ouside
Australia?
MAIDMENT I think there is a lot of
qualitative interest. It boils down to
the kinds of levels that make sense
for Australian issuers and the pricing
of competing product for offshore
investors. Unfortunately, there is still a
substantial gap between the two. UK
master trusts are doing deals at Libor
plus 160 basis points with 30 per cent
credit in hand; an Australian RMBS
transaction at the same levels just
wouldnt stack up economically for us.
But investors are interested
in Australian collateral and they
understand its performance. The
question in my mind as this opportunity
develops is whether investors are
willing to differentially price for different
collateral and servicer quality, even
though we are talking about triple-A
RMBS offerings.
TUTTLE We are looking wider, to the US
market for example. We have spent
a lot of time on non-deal roadshows
explaining our acquisition of the
predominantly prime GE mortgage
portfolio in late 2011. We would like to
be able to bring a prime RMBS deal,
market conditions willing, in the second
half of 2012.
We have term funding facilities in
place for the GE mortgage portfolio so
we dont have to come to the market
with any degree of urgency. But frankly
we think its important that we create
a prime RMBS issuing shelf backed
by collateral managed and serviced by
Pepper Australia.
To achieve a sizeable deal we
have to secure a sizeable bid, and that
means we think we may have to do
some of the triple-A notes in the US.
The feedback we have had to date is
encouraging.
I think we have to be careful of
creating short-dated money market
tranches that satisfy current US investor
appetites but then create Australian
dollar-denominated tranches that dont
necessarily satisfy domestic investor
requirements. The other thing we need
to be mindful of is the fact that we may
still require government support to get a
prime RMBS deal done.
AUSTRALIAN BANKS HAVE SOLD SUBSTANTIAL VOLUMES OF COVERED BONDS IN OFFSHORE MARKETS
SINCE REGULATION ALLOWING THEM TO ISSUE THE PRODUCT WAS PASSED IN OCTOBER 2011. ISSUERS
POINT OUT THAT THE LONG-ESTABLISHED COVERED BOND MARKET IN EUROPE MEANS THERE IS A DEEP
POOL OF INVESTORS WHO UNDERSTAND THE PRODUCT. FOR THIS DEMAND TO MOVE TO RESIDENTIAL
MORTGAGE-BACKED SECURITIES (RMBS), HOWEVER, STRUCTURES MAY NEED TO CHANGE.
ROUNDTABLE
directly fungible between two different deals; each one has to
be underwritten.
HANNA I actually think RMBS has the potential to be as

liquid an asset class as senior unsecured, but at the moment
it is a long way from that and it may never get back there. Its
possible, but secondary market liquidity must be provided.
Right now its as if you need an appointment to sell RMBS.
CASEY When it comes to liquidity, we already spoke about

ADIs being fairly aggressive buyers of RMBS and I think we
must consider the fact that ADIs have liquidity through
RMBSs repo eligibility, whereas others reach liquidity only
through selling its just a different dynamic.
HENDRY In general, bank investors are buy-and-hold

participants: the paper gets caught up so there is no liquidity
on the other side. Bank investor buying just morphs into a
black hole it doesnt develop the market. We might have
to go to a market-clearing price level for RMBS to get enough
investors involved to start that velocity going through. But the
spreads that are available to flow through to RMBS margins
might not work.
CASEY It remains a reasonably illiquid asset base that suits

some buyers more than others.
MAIDMENT The introduction process of Basel III in Australia

has certainly had an impact on activity in the RMBS and
bank bond markets. Most recently, late in 2011 the planned
Reserve Bank of Australia committed liquid facility was
amended to include internal RMBS as part of meeting the
liquidity coverage ratio. This has reduced the need for banks to
securitise mortgages and externalise RMBS to meet additional
liquidity requirements.
ADIs will still need components of different liquidity in
their portfolios, but we dont yet know what proportion of
each the regulator will require. Once that information is
finalised, it may spur some change in the level of activity from
ADI investors.
However, that will depend on how much of liquid assets
books is held in pure level-one securities, how much of the
securities that are held in the committed liquid facility will
be made up of internal RMBS, and what additional assets
including RMBS will make up the rest of the portfolio.
Davison Will increased bank book holdings of
RMBS help secondary liquidity? The banks are
the largest investor sector already but their
participation is not stopping illiquidity.
MAIDMENT Having an active ADI investor base enhances the

depth of the market and therefore potential liquidity. That
said, in the back half of last year the RMBS deals getting done
were largely driven by ADI investors rather than real money.
That is not adding to bank system funding. At some point
the banking sector actually has to go and sell bonds to real-
money investors, offshore investors or someone else outside
its own sector. There is only a certain degree to which these
transactions can be ADI to ADI that is an important point to
get across.
HENDRY Perhaps fund managers also have to market their

funds differently to end investors. It is possible that the fixed
income asset class needs to have closed-end funds where
managers can tell investors on day one what their returns are
they know the margin will be there along with some form
of substitution.
BRUNTON We dont use RMBS for liquidity. Within our core

credit models with funds specifically trying to target a
broad set of industries we have been holding 10-13 per cent
in RMBS over the last few years. And we took that up from
5-6 per cent due to spreads jumping wider. Our cash books
hold approximately 20-30 per cent in floating rate notes, and
maybe 10 per cent of the cash portfolios are RMBS. I wouldnt
really take RMBS holdings much above that in the diversified
credit fund.
We have some offshore clients who are inclined to be
fixed-rate buyers and as a result dont like pass-throughs, so
some product feature changes could develop a bigger buyer
base among our clients. But there are still a lot of industries
and issuers that are trading wider than RMBS; financials
look attractive to us again given some of the actions Europe
has accomplished through the long-term refinancing
operation facilities. And there are still a lot of longer-dated
infrastructure-like assets in Australia that are funded at 150-
250 basis points over bills.
Verlander One might think that there would be
and maybe there already is movement from
equities to xed income in asset allocation. But
it is not apparent to me that that has actually
happened. Is there any activity on that front?
I ACTUALLY THINK RMBS HAS THE POTENTIAL TO BE AS LIQUID
AN ASSET CLASS AS SENIOR UNSECURED, BUT AT THE MOMENT
IT IS A LONG WAY FROM THAT AND IT MAY NEVER GET BACK
THERE. RIGHT NOW ITS AS IF YOU NEED AN APPOINTMENT TO
SELL RMBS.
DAVID HANNA MACQUARIE FUNDS MANAGEMENT
43
HENDRY It is being discussed, but I think reality says youre

right: its not flowing through yet even though the tide is
turning.
MAIDMENT I think the sensible debate that is happening

around the superannuation industry as a whole is not about
the accumulation phase but about the retirement phase. If
you look at the cash-flow profile of an RMBS deal it looks quite
nice in terms of an amortising profile that a portfolio can be
built around to pay a longer-term retirement income stream.
This will happen over the course of time, but are we all going
to wait around for 20 years when that pool of retirees becomes
substantially larger?
PLATER We have certainly seen some superannuation funds

expressing an increased level of interest in secured assets, of
which mortgage-backed lending is one. So perhaps the debate
we are talking about has sliced through to the consciousness
of more stable retirement streams within the overall
superannuation portfolio construction.
GOVERNMENT SUPPORT
Hendry Is the AOFM
making the RMBS market
more transparent or is it
complicating the situation?
HANNA Continued AOFM presence is
necessary to maintain the market and
stimulate competition, though it has
gone on for a lot longer than even the
AOFM probably expected.
The key issue is what its role will
be going forward. Demand for primary
deals could increase if the AOFM
became involved in the secondary
market rather than limiting support to
primary deals. Its getting to that tricky
stage where it appears a lot of the
efforts over the last two years have
not had a significant impact on pricing
or demand for the overall asset class.
TUTTLE I think the AOFM presence is
still needed. It is filling pockets in the
capital structure that the market still
hasnt fully stepped into. The AOFM
is still there not because the issuers
necessarily want it there but they
need its support in specific tranches of
the capital structure. The AOFM is still
serving a useful purpose, as much as
Id love to get a deal done without it.
I dont ascribe to the view that the
AOFM participation is damaging the
market. It is important to keep non-
bank prime issuance happening, which
I think has been positive. Clearly wed
like to see the government able to
step away, but the AOFMs support is
still needed.
MAIDMENT I think there were some
concerns around relative pricing when
the AOFM was the sole buyer, and
this is still one of the challenges at
the moment: everyone wants 2.5- to
three-year pass-through RMBS, but
someone needs to buy the longer
tranches with extension risk.
Our solution in Medallion 2011-1
was to offer a five-year soft bullet
tranche and that attracted a different
type of portfolio buyer. But in most of
the non-major bank RMBS deals, we
saw that the AOFM was the buyer
of choice for the longer-dated pass-
through tranches.
MCCARTHY When we rate RMBS we
do cash-flow modelling to make
sure transactions are solvent, and a
lot of the time if the AOFM was not
participating at a non-market price
there would be no deal.
MAIDMENT Its true that there is a limit
in terms of where spreads can go in
RMBS. Due to the RMBS structure,
at some point as spreads widen we
will not be able to do a transaction as
there wont be sufficient yield in the
pool.
Clearly this isnt the case for
senior and covered bonds. It almost
provides a natural supply limit at a
point when spreads are widening,
which I would have thought was
attractive, right way around risk for
investors in this asset class.
THE AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT (AOFM) HAS PROVIDED STRONG SUPPORT FOR THE
DOMESTIC RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS) MARKET SINCE FIRST RECEIVING THE
MANDATE TO BUY THESE SECURITIES IN 2008. IN TOTAL THE GOVERNMENT DEBT MANAGEMENT AGENCYS
ALLOCATION POOL FOR THE ASSET CLASS AMOUNTS TO A$20 BILLION (US$19.9 BILLION).
IN GENERAL, BANK INVESTORS ARE BUY-AND-HOLD
PARTICIPANTS: THE PAPER GETS CAUGHT UP SO THERE IS NO
LIQUIDITY ON THE OTHER SIDE. WE MIGHT HAVE TO GO TO A
MARKET-CLEARING PRICE LEVEL FOR RMBS TO GET ENOUGH
INVESTORS INVOLVED TO START VELOCITY GOING THROUGH.
PETER HENDRY COMMONWEALTH BANK OF AUSTRALIA
FEATURE
THE SLOW BURN
A slow start for the securitisation market
in 2012 has been complemented by the
unleashing of a torrent of covered bonds
from Australias major banks. As the
market adjusts to the changed dynamics
created by a new asset class, investors
are pondering their options. Given the
quality of Australian collateral remains
exceptional their key issues are pricing,
liquidity and structure.
BY KIMBERLEY GASKIN
2011, the Australian Office of Financial Management (AOFM)
played its role in trying to establish a price point for residential
mortgage-backed security (RMBS) transactions, selling A$50
million of four-year RMBS in March at 132 basis points over the
five-year swap rate. This adjustment to the AOFMs holdings
was undertaken as part of its portfolio management activity
and to provide transparent pricing guidance to the market,
noted the agency.
Only a major price contraction of covered bond primary
margins between January and the end of the first quarter
and the sense that most of the tightening that would occur
had happened helped drag RMBS into economically sensible
territory for Australian issuers.
Commonwealth Bank of Australias five-year, domestic
debut covered bond priced at 175 basis points over swap in
January, while ANZ Banking Group (ANZ) priced its inaugural
AUD covered bond in March at 95 basis points over swap. That
contraction brought the relative value proposition for RMBS
swimming just into range.
North of 150 basis points issuance is uneconomical
for any part of the capital structure, comments Robert
Camilleri, managing partner at Realm Investment House
(Realm) in Melbourne. Even at Mays levels RMBS issuance is
only just sustainable.
Secondary market activity across both covered bonds
and RMBS remains quite subdued, with investors reporting
virtually no selling in covered bonds and only a few trades in
RMBS. In terms of what this says about RMBS markets, its
actually quite encouraging, comments John Sorrell, head of
credit at Tyndall Investments (Tyndall) in Sydney. In the days
of the global financial crisis we were deluged with stock. This
time around there is paper available but the flow is much
slower and levels are not blowing out so profoundly relative to
primary levels. Sorrell estimates secondary levels at around
10-20 basis points wider than primary, compared with the
100-150 point blow outs that characterised the financial crisis
period. This is symptomatic of a healthier market, he adds.
T
he most common descriptor for the Australian
securitisation market as April gave way to May
is as prosaic as it is accurate: slow. At A$2.63
billion (US$2.62 billion) equivalent over just three
transactions in the year to May 7, it is the slowest start
for securitisation since the ground zero year of 2008, when
under A$1 billion equivalent was issued by early May.
Towards the end of the first quarter of 2012, with no deals
seemingly on the horizon since First Macs A$300 million
FirstMac Mortgage Funding Trust Series 2-2011 in December
SOURCE: KANGANEWS MAY 7 2012
ANNUAL ABS VOLUMES FROM AUSTRALI AN I SSUERS
70
60
50
40
30
20
10
0
Foreign currency volume (AUD equiv.) AUD volume
2006 2007 2008 2009 2010 2011 2012
V
O
L
U
M
E

(
A
$
B
N

E
Q
U
I
V
.
)
8.4
10
22 24.6
0.97
2.9
1.7
0.9 2 0
COVERED BOND I SSUANCE BY AUSTRALI AN BANKS
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
CBA WESTPAC ANZ NAB
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
11,832
7,570
6,765
2,829
25
40
25.9
31.9
YTD
45
SIGNS OF LIFE
While the RMBS market has failed to ignite, there are some
encouraging sparks. Even if the overall volume is quite low,
the types and structures of deals are a balm of sorts until
there is less sporadic deal flow. ING Bank Australia (ING)s
A$744 million IDOL Trust Series 2012-1 priced at the end of
March, was a fairly vanilla, price-establishing transaction for
local investors.
The deal was structured conservatively to appeal to local
investors, with a particularly appealing level of subordination
tempting buyers. The transaction carried 3.2 years weighted
average credit support below the senior tranche beginning
at 7 per cent on day one and building to 18 per cent before a
pro rata amortisation between the senior and subordinated
tranches. In Australian RMBS deals it is more typical to double
the subordination over time.
ME Banks A$1 billion SMHL Securitisation Fund 2012-1,
which priced in April, was a cat of a different colour, with a
US$420 million, one-year bullet maturity tranche aimed at
US money market investors. This tranche was supported by a
redemption facility provided by National Australia Bank (NAB),
under which NAB guarantees to underwrite any potential
shortfall in the tranches redemption fund at maturity date.
The years third offering was different again: on May 4
Pepper Homeloans (Pepper) priced the first non-conforming
transaction of the year in a A$300 million deal.
Comments Stephen Maher, head of debt markets research
at Macquarie Bank in Sydney: The diverse deals we have seen
this year indicate the market is returning to some balance
after a very challenging period. We are starting to evaluate or
create fair-value benchmarks between secured on-balance sheet
structures like covered bonds and secured off-balance sheet
structures like RMBS and unsecured securities.
Given the success of the ME Bank deal, market
participants anticipate more targeted, very tailored
structures will emerge as Australian issuers seek new
offshore investors. Adds Maher: We will see issuers running
the structuring spectrum, from vanilla through to complex
structures, and doing so in order to serve the broadest
possible investor group. However, issuance still needs to be
executed efficiently.
It is one thing to provide a structure that works for a
specific set of investors. But institutions providing a cash
flow hedge as in the case of the ME Bank transaction are
taking risk themselves
and there are limits
to the extent to which
they can do this.
Banks will be focused
on identifying what
suits investors and
seeing if that is cost
efficient, adds Maher.
Market participants are circumspect about volume. My
expectation is for sluggish to middling flow this year. Supply of
non-bank RMBS will be largely determined by the participation
of bank investors, however. They have been active buyers of
covered bonds and bank RMBS, but there are no other big
buyers to purchase non-bank RMBS, says Sorrell.
International context is playing a role in this tepid flow.
January and February were peak times of stress in European
funding markets, effectively kyboshing international investor
appetite and sending local real-money investors into their shells.
Comments Camilleri: Internationally there has been strong
focus on the long-term refinancing operation [LTRO] and
investors have focused on LTRO or repo-eligible securities only.
Closer to home the complete rearrangement of the structured
finance market by the introduction of covered bonds affected
real-money investor appetite for RMBS.
COVERED BONDS
But clearly the main contributor to the sluggish beginning
for securitisation has been the advent of a shiny new triple-A
rated asset class covered bonds. By May 7, A$10.1 billion in
covered bond issuance had hit the domestic market over the
course of 2012, with another deal from at least one non-major
bank anticipated to follow. According to KangaNews data, to
May 7 2012 total covered bond issuance since the market for
Australian issuers opened in October 2011 has been US$28.996
billion equivalent; over that same period of time US$10.5
billion equivalent has been issued by Australian securitisation
I SSUANCE COMPARI SON:
ABS AND COVERED BONDS BY AUSTRALI AN I SSUERS
12,000
10,000
8,000
6,000
4,000
2,000
0
ABS Covered bonds
OCT 11 NOV 11 DEC 11 JAN 12 MAR 12 APR 12 MAY 12
TD
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
4,390
0
0
0
2,250
523
FEB 12
1,868
1,636
10,902 11,089
2,050
2,182
299
998
1,329
We will see issuers running the structuring spectrum,
from vanilla through to complex structures, and doing
so in order to serve the broadest possible investor
group. Banks will be focused on identifying what suits
investors and seeing if that is cost efficient.
STEPHEN MAHER MACQUARIE BANK
FEATURE
While the lower levels of
securitised transactions in the
Australian market mimic supply
trends offshore, there is a profound
difference between the reasons
why there is such a difference in
supply. In markets like the US the
level of delinquencies on underlying
mortgages have been so high they
have profoundly compromised
RMBS, leading to very negative
sentiment on the asset class on the
part of investors.
Australia shows its quality
AS DELINQUENCY LEVELS IN OTHER DEVELOPED MARKETS MOST
NOTABLY THE US STAY AT HISTORICALLY HIGH LEVELS, AUSTRALIAN
COLLATERAL PERFORMANCE REMAINS EXCEPTIONAL. WHILE THERE ARE
SOME HEADWINDS FOR THE LOCAL ECONOMY WHICH MAY AFFECT THE
MORTGAGE MARKET, INVESTORS DO NOT ANTICIPATE ANY MAJOR EFFECT
ON RESIDENTIAL MORTGAGE-BACKED SECURITIES (RMBS).
While the situation in the US continues
to improve it is still markedly worse
than the Australian experience. Fannie
Maes serious delinquency rate
single-family home loans at least three
months past due or near foreclosure
was at 3.67 per cent for Q1 2012,
down from 5.47 per cent a year earlier.
Australia has even outperformed the
UK market, which has itself remained
reasonably resilient. In November 2011
the most recently available data from
Moodys UK prime RMBS 90-day plus
delinquencies were at 1.89 per cent.
The numbers support what Australian
borrowers have been telling offshore
investors since the onset of the global
financial crisis: the Australian market
is different. Tighter lending standards,
a different tax regime and a different
philosophy towards debt have kept
lending within sensible boundaries (see
p16-17).
Moodys does not anticipate that
delinquencies in Australia will rise
over 2012. The low interest rate
environment and moderate economic
growth will offset unemployment and
underemployment in certain sectors
of the economy such as retail and
tourism, comments Arthur Karabatsos,
senior analyst at Moodys in Sydney.
Moodys Analytics expects Australian
GDP to grow to 3.4 per cent in 2012
from 2.8 per cent in 2011. Meanwhile,
the all-important unemployment figure
SOURCE: MOODY S I NVESTORS SERVI CE MAY 2012
DATE AUSTRALIA (60-DAY) AUSTRALIA (90-DAY) UK (90-DAY) IRELAND (60-DAY)
JAN/FEB 12 0.34 0.64 N/A 11.98
JAN/FEB 11 0.31 0.60 1.91 6.6
JAN/FEB 10 0.24 0.49 1.91 3.34
JAN/FEB 09 0.30 0.64 1.82 1.59
SOURCE: MOODY S I NVESTORS SERVI CE MAY 2012
AUSTRALIAN RESIDENTIAL MORTGAGE ARREARS
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
D
E
L
I
N
Q
U
E
N
C
I
E
S

(
%

O
F

C
B
)
90+ 30-60 60-90
2001 2002 2003 2004 2005 2006 2007 2008 2010 2009 2011
issuers. The markets appear to be reflecting one another
clearly: high issuance in one product has tended to coincide
with low levels of issuance in another (see chart on p45).
While INGs IDOL transaction was supported by some
real-money investors, according to the banks Sydney-based
treasurer, Michael Witts, the question resounding through
the Australian seciuritisation market this year has been where
domestic fund managers are.
Paul Garvey, general manager, funding and financial
markets at ME Bank in Melbourne, says he is surprised at
the absence of domestic real-money investors. The issuer
specifically tailored a US dollar tranche for money market
The Australian collateral performance
experience sits firmly at the other
end of the spectrum. According to
Moodys Investors Service (Moodys)
the most recently available data up
to February 2012 demonstrates that
arrears levels are still extremely low in
Australia compared with international
peers. Delinquencies on 90-day plus
mortgages were at 0.64 per cent at
the end of February, a slight increase
on levels from 2011 and 2010 (see
chart on this page).
60/90-DAY DELINQUENCIES: INTERNATIONAL COMPARISON (%)
47
The key point is that for trend growth
of around 3.25 per cent to be achieved,
interest rates need to be lowered
significantly and benign inflation
provides plenty of scope to do so.
SHANE OLIVER AMP CAPITAL
investors so as to diversify investor demand. There is large
pricing divergence between a triple-A rated covered bond and
a triple-A rated securitisation bond, which should appeal to
domestic real-money investors, he comments.
Garvey says the bank sold the subordinated notes of its 2012
transaction to self-managed super funds and high net worth
individuals while most of the senior real money investment
came from the US. There is certainly a market there, but
Australian institutional investors are currently not part of it,
notes Garvey.
It is not that fund managers do not want RMBS. In fact,
some buyers express a preference for the RMBS structure, given
is not widely expected to change
drastically. Most commentators
predict a 2012 average of between
5.1 and 5.7 per cent, while the
April figure was a positive surprise
at 4.9 per cent.
There is no doubt some of
the macroeconomic data from
Australia look soft, however.
According to data from AMP
Capital, retail sales growth has
been weak, up only 2 per cent
in the year to March. In addition,
housing-related activity is sluggish,
with housing prices down around 6
per cent from 2010 highs.
But, as AMP Capitals Sydney-
based economist, Shane Oliver,
says: None of this is to say the
economy is collapsing. Rather, the
key point is that for trend growth
of around 3.25 per cent to be
achieved, interest rates need to be
lowered significantly and benign
inflation provides plenty of scope
to do so. The Reserve Bank of
Australia (RBA) has taken the
initiative, cutting rates by 50 basis
points in May.
The two key areas of concern for
international investors in Australian
RMBS tend to be fear of sharp
house price declines and the
impact of a slowdown in China.
Housing price decline
There has certainly been a decline
in Australian house prices. Over
the 12 months ending March
2012, house prices fell across all
major cities. Brisbane recorded
the largest decline of 6.14 per cent,
followed by Adelaide with 5.66 per
cent. House prices in Sydney fell by
3.15 per cent. On a weighted average
basis, house prices in the capital cities
reduced by 4.39 per cent over the
same period according to Moodys.
However, the broad expectation is
still for a long plateau rather than
a gut-churning drop. In the RBAs
May statement on monetary policy,
following the 50 basis point cash
rate cut, governor Glenn Stevens
expressed some concern but also
stated the reserve banks view
that some stability has emerged.
Housing prices have shown some
signs of stabilising recently, after
having declined for most of 2011, but
generally the housing market remains
subdued, he said.
The China syndrome
As for the impact of a weaker China,
there has yet to be any flow through
on to Australian RMBS. A mighty
confluence of events would be
required to trigger any real reaction,
according to Vera Chaplin, primary
credit analyst at Standard and Poors
(S&P) in Melbourne.
The credit quality of most Australian
RMBS is likely to remain stable,
despite renewed uncertainty over the
global economic outlook and growth
prospects for China, she says. While
S&P expects the performance of the
housing market and housing loans
to weaken, the credit enhancement
available to Australian senior RMBS
is likely to withstand a worsening of
portfolio credit quality.
Chaplins view is based on S&Ps
assessment of the quality of the
RMBS loan portfolio. With the
weighted average loan-to-value
ratio at 62 per cent and weighted
average seasoning at about 60
months, underlying portfolios are
well-positioned to withstand any
deterioration in economic conditions.
Australian households have also
responded quite actively to declining
economic conditions, creating
another layer of protection for RMBS.
Households are actively managing
their financial positions and increasing
their savings by taking advantage of
changes in monetary policy. Property
prices in Australia are declining
gradually, and lenders mortgage
insurance providers as well as lenders
have tightened their underwriting
standards, notes Chaplin. These
preparations have put Australian
households, and especially the RMBS
sector, in a good position to handle a
slowdown in China.
FEATURE
When the Australian Office of
Financial Management (AOFM)
announced its intention to purchase
residential mortgage-backed securities
(RMBS) to support competition
in Australias mortgage market in
September 2008, few imagined that
government support would remain
as necessary as it clearly still is nearly
four years later.
The original A$8 billion (US$7.98
billion) purchasing programme was
extended in 2009 by another A$8
billion, and in April 2011 the federal
Treasurer issued a direction for the
AOFM to invest up to an additional
A$4 billion in Australian RMBS. By the
end of the first week in May 2012, the
AOFM had invested A$14.9 billion in
45 RMBS deals, allowing 19 lenders to
raise over A$30 billion in funding.
The AOFM has been weaning the
market off its high level of support,
with its buying falling from A$5.75
billion in 2009 to A$2.1 billion in 2011
(see chart on this page). In 2012 to
May 7 the AOFM had bought A$323.5
million across two transactions ING
Bank (Australia)s A$744 million IDOL
Trust Series 2012-1 and ME Banks
A$1 billion SMHL Securitisation Fund
2012-1.
In its April 2012 update to the
market, the government debt
management agency reiterated
the temporary nature of the
programme and in November 2011
the Department of Treasurys
Withdrawing support
SECURITISATION MARKET PARTICIPANTS LONG FOR AN INDEPENDENTLY
ROBUST MARKET, BUT GOVERNMENT SUPPORT IS STILL A CLEAR NECESSITY.
On a philosophical level, issuers long
to be independent of the government
support. Notes Tim Hughes, treasurer of
Suncorp Bank and chairman of the ASF:
We understand that the programme
is reducing significantly in terms of
how much the AOFM has to invest and
we are equally keen to see the market
stand on its own two feet.
But there is clear acknowledgment
that now is too soon for that support
to be ripped away. The industry will
need to come together to facilitate a
transition from the AOFM regime,
notes Hughes.
Paul Garvey, general manager,
funding and financial markets at ME
Bank, believes that AOFM support
remains important. He says: The
programme was set up to encourage
competition to lending and it is fulfilling
that task at the moment. The AOFM co-
invests with other investors and without
their support it becomes more difficult
for regional issuers to fund effectively
through securitisation markets.
By implication, the remaining A$5.1
billion currently committed by the
government could support over A$10
billion of issuance. However, issuers
are not convinced that primary market
flow will really pick up in the absence
of domestic real-money participation.
Domestic fund managers just
arent buying, and although bank
balance sheets and offshore real-
money accounts are, wed like
to see Australian fund managers
participating, says Garvey.
The AOFM programme was set up
to encourage competition to lending
and it is fulfilling that task. Without
its support it becomes more difficult
for regional issuers to fund effectively
through securitisation markets.
PAUL GARVEY ME BANK
executive director, markets group,
Jim Murphy, talked in more detail
about encouraging a transition
towards a sustainable and innovative
securitisation market that is not
reliant on government support, at
the Australian Securitisation Forum
(ASF)s annual conference.
Not only does the RMBS
market continue to show signs
of resilience, but both the asset-
backed security and commercial
mortgage-backed security markets
seem to showing signs of life as
well, said Murphy. He added: This
is of course partly due to the very
high-quality product that is being
sold. Australian mortgages continue
to record very low delinquencies,
underpinned by the strong Australian
macro economy. In the longer term,
I am confident the securitisation
market will remain an important part
of our financial landscape.
SOURCE: AUSTRALI AN OFFI CE OF FI NANCI AL MANAGEMENT MAY 2012
AOFM BUYI NG PROGRAMME NOVEMBER 2008 TO MAY 2012
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2008 2009 2010 2011
V
O
L
U
M
E

(
A
$
M
)
2012
1,900
5,750
4,780
2,070
323
49
the covered bond product is still in its infancy in Australia.
Institutional investors bought covered bonds in droves in
response to the far wider-than-anticipated pricing on the early
deals, which presented an opportunity too good to pass up.
However, Sorrell believes RMBS have a cleaner structure than
the covered bond product. I would not want to test the claim
on a covered bond because the complexities are immense, he
comments. RMBS are clear cut: the cash flows are determined
by when the mortgages pay back, unlike a covered bond
which has a fixed final maturity that requires disposal of
mortgages that may have a long time to repayment. In the case
of a covered bond you have the whole of the banks balance
sheet to consider.
Realms Camilleri is also remaining circumspect on covered
bonds, in spite of liking the value in the early deals. Covered
bonds have the benefit of overcollateralisation and the balance
sheet guarantee, but banks are not immune to corporate
downgrade. People dont realise the very real nature of the risk
that banks are downgraded to a level where the triple-A rating
on the covered bond comes under pressure, he comments. In
many respects Camilleri is happier with RMBS, which carry no
balance sheet risks. I think the outcomes in the event of default
or downgrade scenarios are clearer with RMBS.
Likewise, Jeff Brunton, head of credit markets at AMP
Capital in Sydney, argues that RMBS have been a bedrock of
stable income. Although he was delighted with the margin on
the early covered bonds, Brunton still likes securitisation. Pre-
payment rates are starting to slow down, but new generation
pools with very good credit enhancement make a really good
contribution to a diversified credit fund, he comments. That
said, Brunton acknowledges that AMP Capital is not buying
much right now.
RELATIVE VALUE AND LIQUIDITY
For domestic fund managers relative value and liquidity
remain key issues, even though the levels on covered bonds
have crunched in so significantly and in spite of their concerns
about the covered structure. Investors say the pricing for the
difference in liquidity between the covered and securitised
products is still not wide enough given the relative illiquidity
of RMBS.
Says Sorrell: Covered bond pricing is certainly more
rational, which has meant an opportunity has opened for
RMBS issuance. However, generally issuers are still wanting
tighter margins on
their RMBS than we are
willing to pay. At 140
basis points over swap
its only just bearable for
issuers, but its only just
bearable for investors
at that level given the
illiquidity of RMBS.
Brunton also feels the gap between issuer and investor
expectations is still too wide when it comes to RMBS. Covered
bonds and senior unsecured have demonstrated some real
liquidity but RMBS has been notably illiquid, he says.
Liquidity for the whole market is strongly influenced by
the Australian Prudential Regulation Authority (APRA) and
the ability for banks to make a market and hold stock on their
balance sheets without punitive capital restrictions. With
clarity on the liquid assets regime also still pending, investors
remain cautious on the liquidity of RMBS and are adamant
about the price they want for that illiquidity. We have had
some dialogue about the price at which we would buy, but its
still not at a level that makes sense for us, notes Brunton.
RMBS is well and truly a buy-and-hold asset, and investors
do not see much changing any time soon. In Australia,
liquidity for the whole market is a challenge because of the
lack of ability for price makers to be able to borrow stock and
make a price. This is because RMBS have traditionally been buy-
and-hold assets and will remain that way until the liquid assets
regulation is clarified, explains Camilleri.
MASTER TRUST STRUCTURES
One option to boost liquidity is the introduction of a master
trust structure to take out the pre-payment risk and offer a
bullet structure to fixed income investors. The Australian
Securitisation Forum (ASF) is working on recommendations
to redraft APS120 to include master trusts. ASF chairman,
Tim Hughes, believes this will also facilitate the international
investor base. European buyers in particular are more
comfortable with master trusts, he comments (see Q&A on p10).
Some domestic investors see merit in the master trust
structure for the non-bank issuers. Camilleri argues that for
a bank issuer there is no real concern around redemption or
refinancing, as these borrowers have other diverse sources
of funding. Consequently, a master trust will only facilitate a
bullet issuance capability given they require a revolving pool.
However, when considering the redemption and call features
of the non-bank issuers, it definitely is a question of concern,
primarily because they have smaller balance sheets, and are
almost always reliant on a banking partner to call deals back
into a warehouse, says Camilleri. Their business model is not as
flexible due to the narrowly-focused funding strategy. He believes
a master trust will work for these players but it will be centred
around the cost, as they need a liquidity provider a bank.
I prefer clean, simple structures. Master trusts and
restructuring into bullet form creates structural
complexity and less clarity on the pool assets which
are more subject to change. It is not clear to me that
the bullet structures will be much more liquid.
JOHN SORRELL TYNDALL INVESTMENTS
FEATURE
Sorrell is not convinced a change in structure will alter
liquidity. I prefer clean, simple structures. Master trusts and
restructuring into bullet form creates structural complexity
and less clarity on the pool assets which are more subject
to change, he comments. It is not clear to me that the
bullet structures will be much more liquid especially since
the bullet will most likely still be a soft one unless further
structural complications are added.
WAITING FOR THE CLF
While real-money investors have been notably absent from
securitisation deals, bank liquids portfolio managers have been
supporting the market, outstripping domestic fund manager
appetite for both securitised and covered bond product by a
considerable margin. Bank investors do not share some of the
reservations of fund managers about covered bond structures.
Covered bonds are a great asset, with terrific yield and
a strong rating. We find them so much easier to manage
compared with RMBS because they act like a normal bond
you dont have principal repayments to manage like you do
on mortgages and theres no pre-payment risk, says Colin
Roden, managing director, group treasury at Westpac Banking
Corporation (Westpac) in Sydney.
The only downside as far as Roden is concerned is the
constraint on supply caused by the regulated cap on issuance
and the expectation that going forward most of the covered
bond issuance from the majors will occur offshore.
Certainly bank investors see covered bonds and RMBS as
complementary rather than competitive, in spite of the yield
differential. Given bank balance sheets are not expected to
be a profit centre, their motivations for buying are vastly
different from the drivers for fund managers, which accounts
While we are aware of what qualifies
and what the fees and haircuts are for
the CLF, we dont yet know how much
we actually have to hold in liquids, how
much CLF we can use, what our limits
on level two assets are, and what mix of
assets we can have in the CLF.
COLIN RODEN WESTPAC BANKING CORPORATION
neatly for the difference in
sentiment around the pricing
for liquidity risk.
Comments a second bank
investor: While most fund
managers will look at relative
value between covered bonds
and RMBS, we usually buy
both because we need the
diversity. Covered bonds are generally five-year instruments
while pass-through RMBS typically offer a three-year weighted
average life, so we are happy to carry both.
REGULATORY PAUSE
Bank investors have been active buyers of covered bonds since
the asset class was introduced in Australia, and have been long-
term participants in the domestic RMBS market. While both
asset classes continue to be part of banks buying plans, they
say their appetite has been affected to some degree by pending
liquid assets clarification.
APRA has indicated that internal securitisation, along with
government bonds, domestic bonds issued by supranationals
and other foreign governments, and debt and asset-backed
securities issued by authorised deposit-taking institutions
(ADIs), will be included in the pre-arranged committed
liquidity facility (CLF) vehicles that banks can use to make up
the shortfall on their liquidity coverage ratios (see Q&A on p31).
There is no indication that either APRA or the Reserve Bank of
Australia (RBA) have a desire to reduce the use of internal RMBS
within CLFs.
As a result, bank investors say the CLF regime particularly
the inclusion of self-securitisation has slightly dampened
their appetite for other assets classes. We anticipate more
internal RMBS going forward, notes one bank buyer.
The inclusion of internal RMBS as an acceptable asset in CLFs
takes some of the pressure off ADIs requirement to realign their
liquid assets pools, especially as the RBA does not indicate any
explicit cap on the proportion of the facility that can be made up
of this type of paper (see Q&A on p32).
Internal RMBS remains a significant component of ADIs
liquid assets books. For example, in their most recent half-
year results, ANZ and Westpac reported that they held A$28.6
billion and A$35 billion, respectively, in internal securitisations
in their liquid assets books. ANZs liquid assets book totalled
A$99 billion, while Westpacs totalled A$101 billion.
But until each bank finalises their CLF with APRA, liquid
portfolio managers say they do not expect to conduct a
substantial rebalancing of the portfolio mix. As Westpacs
Roden explains: While we are aware of what qualifies and
what the fees and haircuts are, we dont yet know how much
we actually have to hold in liquids, how much CLF we can use,
what our limits on level two assets are, and what mix of assets
we can have in the CLF.
Covered bonds and senior unsecured have
demonstrated some real liquidity but RMBS has
been notably illiquid. We have had some dialogue
about the price at which we would buy, but its
still not at a level that makes sense for us.
JEFF BRUNTON AMP CAPITAL
51
AUSTRALIA & NEW ZEALAND BANKING GROUP
ISSUER AUSTRALIA AND NEW ZEALAND BANKING GROUP
ISSUER RATING (S&P/MOODYS/FITCH) AA-/Aa2/AA-
REPORTING PERIOD OCTOBER SEPTEMBER
TOTAL DOMESTIC ASSETS (A$BN) 360 (31 MAR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 2 APR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 7,926,913,370
NO. OF LOANS (UNCONSOLIDATED) 28,346
NO. OF LOANS (CONSOLIDATED) 28,346
AVE. LOAN SIZE (CONSOLIDATED) (A$) 279,648
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,972,274
WEIGHTED AVE. CONSOLIDATED CURRENT LVR (%) 64.16
WEIGHTED AVE. CONSOLIDATED
CURRENT INDEXED LVR (%)
64.25
WEIGHTED AVE. INTEREST RATE (%) 6.57
WEIGHTED AVE. SEASONING (MONTHS) 14.65
WEIGHTED AVE. REMAINING TERM (MONTHS) 337.33
INVESTMENT LOANS (%) 22.63
30+ DAY ARREARS (%) 0.17
MORTGAGE POOL BY GEOGRAPHIC DISTRIBUTION:
NSW&ACT / VIC / TAS / QLD / SA / WA / NT (%)
27.72 / 34.78
/ 1.94 / 14.44
/ 5.72 / 14.80
/ 0.61
I SSUANCE SUMMARY TO DATE ( MAY 11)
TOTAL OUTSTANDING IN BENCHMARK FORMAT
(US$M EQUIV.)
6,432
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT
(US$M EQUIV.)
334
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$M EQUIV.) 4,248
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 2,517
COVERED BOND PROGRAMME
ISSUING ENTITY ANZ RESIDENTIAL COVERED BOND TRUST
COVERED BOND RATING (MOODYS/FITCH) Aaa/AAA
PROGRAMME TYPE LEGISLATIVE
PROGRAMME SIZE US$20BN
COVERED BOND GUARANTOR PERPETUAL CORPORATE TRUST
SECURITY TRUSTEE P.T.
BOND TRUSTEE DB TRUSTEES (HONG KONG)
SERVICER AUSTRALIA AND NEW ZEALAND BANKING GROUP
TRUST MANAGER ANZ CAPEL COURT
ASSET MONITOR KPMG
STATUTORY OVERCOLLATERALISATION MINIMUM (%) 3.00
CONTRACTUAL OVERCOLLATERALISATION MINIMUM (%) 5.25
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 20.92 (24 APR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 21.13 (24 APR 2012)
EUR
1,274
USD
1,250
NOK
334
BREAKDOWN OF ISSUANCE BY CURRENCY (US$M EQUIV.)
SOURCE: ANZ MAY 11 2012
AUD
3,146
CHF
761
ANZ S COVERED BOND I SSUANCE HI STORY
3,500
3,000
2,500
2,000
1,500
1,000
500
0
NOV 11 DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
1,250
O
2,369
3,146
0 0
ISSUER
PROFILES
COVERED BOND
ISSUER
PROFILES
COVERED BOND
John Needham, Head of Structured Funding, Group Treasury / +61 3 8654 5373 / john.needham@anz.com
Rod Ellwood, Structured Funding, Group Treasury / +61 3 8654 5146 / rod.ellwood@anz.com
FOR FURTHER INFORMATION PLEASE CONTACT: www.anz.com
ANZ S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES SETTLEMENT
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE
ON
PRICING
USD
VOLUME
(M)
COUPON
TYPE
COUPON (%) LISTING
US05252EAA10 (RULE
144A) US05252FAA84
(REG S)
2011-1 23 NOV 11 23 NOV 16 USD 1,250 1.0000 1,250 FIXED 2.400 NOT LISTED
XS0730566329 2012-1 24 JAN 12 24 JAN 22 NOK 2,000 5.9970 334 FIXED 5.000 LONDON
XS0731129234 2012-2 18 JAN 12 18 JUL 22 EUR 1,000 0.7847 1,274 FIXED 3.625 LONDON
CH0143838032 2012-3 13 FEB 12 13 FEB 19 CHF 325 0.9520 341 FIXED 1.500
SIX SWISS
EXCHANGE
CH0142821468 2012-4 13 FEB 12 13 FEB 15 CHF 400 0.9526 420 FRN
65/3M CHF
LIBOR
SIX SWISS
EXCHANGE
AUAU3CB0191872 2012-5 23 MAR 12 23 MAR 16 AUD 1,000 0.9444 1,049 FIXED 5.250 NOT LISTED
AU3FN0015046 2012-6 23 MAR 12 23 MAR 16 AUD 2,000 0.9536 2,097 FRN 95/3M BBSW NOT LISTED
ISSUER COMMONWEALTH BANK OF AUSTRALIA (CBA)
REPORTING PERIOD JULY JUNE
TOTAL DOMESTIC ASSETS (A$BN) 550 (JAN 2012)
ISSUING ENTITY CBA
COVERED BOND GUARANTOR
PERPETUAL
CORPORATE TRUST
BOND TRUSTEE
DEUTSCHE TRUSTEE
COMPANY
SERVICER CBA
TRUST MANAGER (WHOLLY-OWNED
SUBSIDIARY OF CBA)
SECURITISATION
ADVISORY SERVICES
COVER POOL MONITOR
PRICEWATERHOUSE-
COOPERS
STATUTORY OVERCOLLATERALISATION
MINIMUM (%)
3.00
CONTRACTUAL OVERCOLLATERALISATION
MINIMUM (%)
5.25
CONTRACTUAL OVERCOLLATERALISATION
AT REPORTING DATE (%)
22.20 (30 APR 2012)
TOTAL OVERCOLLATERALISATION
AT REPORTING DATE (%)
81.96 (30 APR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 30 APR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 20,693,452,125
AVE. LOAN SIZE (A$) 246,030
MAXIMUM LOAN BALANCE (A$) 1,642,000
WEIGHTED AVE. CONSOLIDATED CURRENT
INDEXED LVR (%)
57.84
WEIGHTED AVE. SEASONING (MONTHS) 34
WEIGHTED AVE. REMAINING TERM (MONTHS) 316
INVESTMENT LOANS (% BY LOAN BALANCE) 30.29
NSW&ACT / VIC / TAS / SA / WA / NT (%)
38.95 / 36.08 / 2.51 /
7.67 / 13.67 / 1.12
53
Simon Maidment, Head of Group Funding and Execution / +61 2 9118 1339 / simon.maidment@cba.com.au
Edward Freilikh, Executive Manager, Group Funding / +61 2 9118 1337 / edward.freilikh@cba.com.au /
FOR FURTHER INFORMATION PLEASE CONTACT: www.cba.com.au
SOURCE: COMMONWEALTH BANK OF AUSTRALI A MAY 11 2012
TOTAL OUTSTANDING IN BENCHMARK FORMAT (US$M EQUIV.) 9,684
TOTAL OUTSTANDING IN PRIVATE PLACEMENT FORMAT (US$M EQUIV.) 2,056
COMMONWEALTH BANK OF AUSTRALI A S COVERED BONDS I SSUED TO DATE
ISIN CODE SERIES
SETTLEMENT
DATE
MATURITY DATE CURRENCY
VOLUME
(M)
FX RATE ON
PRICING
USD
VOLUME (M)
COUPON
TYPE
COUPON (%) LISTING
XS0729014281 1 12 JAN 12 12 JAN 17 EUR 1,500 0.7733 1,940 FIXED 2.625 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 1,875 6.0696 309 FIXED 5.000 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 500 5.9974 83 FIXED 5.000 LONDON
XS0733058969 2 27 JAN 12 27 JAN 22 NOK 1,000 5.8681 170 FIXED 5.000 LONDON
AU3CB0188951 3 25 JAN 12 25 JAN 17 AUD 2,000 0.9621 2,079 FIXED 5.750 UNLISTED
AU3FN0014866 4 25 JAN 12 25 JAN 17 AUD 1,500 0.9621 1,559 FRN 0.9/BBSW UNLISTED
XS0737866060 5 1 FEB 12 1 FEB 27 EUR 109 0.7672 142 FIXED 3.815 LONDON
US20271AAA51 6 2 MAR 12 2 MAR 17 USD 50 1.0000 50 FRN
135/US
LIBOR
UNLISTED
XS0739982980 7 25 JAN 12 2 FEB 27 EUR 67 0.7707 86 FIXED 3.930 LONDON
XS0744839415 8 13 FEB 12 13 FEB 17 GBP 50 0.6337 79 FRN
138/GBP
LIBOR
LONDON
XS0745915826 9 6 FEB 12 13 FEB 30 EUR 117 0.7616 154 FIXED 3.990 LONDON
CH0180071612 10 15 FEB 12 13 MAR 15 CHF 425 0.9223 461 FRN
60/CHF
LIBOR
SIX SWISS
EXCHANGE
CH0180071613 11 15 FEB 12 13 SEP 19 CHF 350 0.9223 379 FIXED 1.500
SIX SWISS
EXCHANGE
XS0751446872 12 23 FEB 12 1 MAR 27 EUR 50 0.7513 67 FIXED 3.700 UNLISTED
US20271AAB35
(RULE 144A)
US20271BAB18
(REG S)
13 16 MAR 12 16 MAR 17 USD 2,000 1.0000 2,000 FIXED 2.250 ASX
CH0183597266 14 5 MAY 12 5 MAY 22 CHF 100 0.9184 92 FIXED 1.625
SIX SWISS
EXCHANGE
XS0775914277 15 3 MAY 12 3 MAY 22 EUR 1,500 0.7638 1,964 FIXED 3.000 LONDON
XS0778752047 16 9 MAY 2012 9 MAY 2022 NOK 750 0.1685 126 FIXED 4.550 LONDON
COMMONWEALTH BANK OF AUSTRALI A S COVERED
BOND I SSUANCE HI STORY
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
DEC 11 JAN 12 FEB 12 MAR 12 APR 12 MAY 12
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
6,227
1,373
0 0
2,050
2,182
NOK
689
EUR
4,352
BREAKDOWN OF I SSUANCE
BY CURRENCY ( US$M EQUI V. )
USD
2,050
GBP
79
AUD
3,638
CHF
932
ISSUER
PROFILES
COVERED BOND
NATIONAL AUSTRALIA BANK
ISSUER NATIONAL AUSTRALIA BANK
TOTAL DOMESTIC ASSETS (A$BN) 457 (NOV 2011)
ISSUING ENTITY NATIONAL AUSTRALIA BANK
COVERED BOND GUARANTOR PERPETUAL CORPORATE TRUST
BOND TRUSTEE DEUTSCHE TRUSTEE COMPANY
SERVICER NATIONAL AUSTRALIA BANK
TRUST MANAGER NAB COVERED BOND TRUST
COVER POOL MONITOR ERNST & YOUNG
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 21.50 (31 MAR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 38.40 (31 MAR 2012)
POOL DATA
PORTFOLIO CUT-OFF DATE 26 MAR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 4,530,855,224.84
AVE. LOAN SIZE (CONSOLIDATED) (A$) 261,460.86
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,360,000.00
WEIGHTED AVE. CONSOLIDATED
CURRENT INDEXED LVR (%)
52.19
WEIGHTED AVE. SEASONING (MONTHS) 24.75
WEIGHTED AVE. REMAINING TERM (MONTHS) 326.50
NSW&ACT / VIC / SA / WA / TAS / NT (%)
41.69 / 37.39 /
5.79 / 11.89 /
2.50 / 0.73
TOTAL OUTSTANDING IN BENCHMARK FORMAT (US$M EQUIV.) 2,053
(US$M EQUIV.)
776
TOTAL OUTSTANDING IN FIXED RATE FORMAT (US$BN EQUIV.) 2,055
TOTAL OUTSTANDING IN FRN FORMAT (US$M EQUIV.) 774
EUR
1,532
NOK
523
BREAKDOWN OF I SSUANCE
BY CURRENCY ( US$M EQUI V. )
SOURCE: NATI ONAL AUSTRALI A BANK MAY 11 2012
GBP
774
NATI ONAL AUSTRALI A BANK S COVERED BOND
I SSUANCE HI STORY
2,500
2,000
1,500
1,000
500
0
DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
523
2,306
0 0 0
55
NATI ONAL AUSTRALI A BANK S COVERED BONDS I SSUED TO DATE
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE ON
PRICING
USD VOLUME (M) COUPON
TYPE
COUPON (%) LISTING
XS0721652252 SERIES-1 20 DEC 11 20 DEC 21 NOK 2,000 5.9694 335 FIXED 5.000 LUXEMBOURG
XS0721652252 SERIES-1 23 DEC 11 20 DEC 21 NOK 500 5.9442 84 FIXED 5.000 LUXEMBOURG
XS0721652252 SERIES-1 30 DEC 11 20 DEC 21 NOK 625 6.0318 104 FIXED 5.000 LUXEMBOURG
XS0730559894 SERIES-2 13 JAN 12 13 JAN 17 EUR 1,000 0.7821 1,279 FIXED 2.625 LUXEMBOURG
XS0733140460 SERIES-3 20 JAN 12 20 JAN 27 EUR 200 0.7883 254 FIXED 4.080 LUXEMBOURG
XS0737096874 SERIES-4 27 JAN 12 27 JAN 15 GBP 500 0.6459 774 FRN 145/LIBOR LUXEMBOURG
WESTPAC BANKING CORPORATION
ISSUER WESTPAC BANKING CORPORATION
TOTAL DOMESTIC ASSETS (A$BN) 582.4 (31 MAR 2012)
ISSUING ENTITY WESTPAC BANKING CORPORATION
COVERED BOND GUARANTOR BNY TRUST COMPANY OF AUSTRALIA
SECURITY TRUSTEE BTA INSTITUTIONAL SERVICES AUSTRALIA
BOND TRUSTEE BNY MELLON CORPORATE TRUSTEE SERVICES
SERVICER WESTPAC BANKING CORPORATION
TRUST MANAGER WESTPAC SECURITISATION MANAGEMENT
COVER POOL MONITOR PRICEWATERHOUSECOOPERS
CONTRACTUAL OVERCOLLATERALISATION AT REPORTING DATE (%) 22.55 (31 MAR 2012)
TOTAL OVERCOLLATERALISATION AT REPORTING DATE (%) 31.50 (31 MAR 2012)
Eva Zileli, Senior Manager, Secured Funding / +61 3 8634 8219 / eva.zileli@nab.com.au
Darren Bell, Manager, Secured Funding / +61 3 8634 2213 / darren.m.bell@nab.com.au /
FOR FURTHER INFORMATION PLEASE CONTACT: www.nab.com.au
ISSUER
PROFILES
COVERED BOND
WESTPAC BANKI NG CORPORATI ON S COVERED BONDS I SSUED TO DATE
DATE
MATURITY
DATE
CURRENCY VOLUME
(M)
FX RATE ON
PRICING
USD
VOLUME
(M)
COUPON
TYPE
COUPON
(%)
LISTING
RULE 144A
US96122WAA80; REG S
US96122XAA63
2011-C1 28 NOV 11 28 NOV 16 USD 1,000 1.000 1,000 FIXED 2.450 LONDON
XS0735613373 2012-C1 8 FEB 12 8 FEB 22 NOK 1,800 6.0485 298 FIXED 5.000 LONDON
XS0735794819 2012-C2 8 FEB 12 8 FEB 22 NOK 1,000 6.0293 166 FIXED 5.000 LONDON
AU3CB0189322 2012-C3 6 FEB 12 6 FEB 17 AUD 1,700 0.9553 1,780 FIXED 5.750 UNLISTED
AU3FN0014874 2012-C4 6 FEB 12 6 FEB 17 AUD 1,400 0.9553 1,466 FRN
165/
BBSW
UNLISTED
XS0747205101 2012-C5 15 FEB 12 16 FEB 16 EUR 1,750 0.7521 2,327 FIXED 2.125 LONDON
AU3FN0014874 2012-C4 24 FEB 12 6 FEB 17 AUD 500 0.9350 535 FRN
165/
BBSW
UNLISTED
SOURCE: WESTPAC BANKI NG CORPORATI ON MAY 11 2012
AUD
3,780
USD
1,000
BREAKDOWN OF I SSUANCE BY CURRENCY
( US$M EQUI V. )
EUR
2,327
NOK
464
WESTPAC BANKI NG CORPORATI ON S COVERED BOND
I SSUANCE HI STORY
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
NOV 11 DEC 11 JAN 12 FEB 12 MAR 12 APR 12
V
O
L
U
M
E

(
U
S
$
M

E
Q
U
I
V
.
)
1,000
0 0 0 0
6,572
POOL DATA
PORTFOLIO CUT-OFF DATE 31 MAR 2012
CURRENT AGGREGATE PRINCIPAL BALANCE (A$) 9,106,705,020.92
AVE. LOAN SIZE (CONSOLIDATED) (A$) 250,943
MAXIMUM LOAN BALANCE (CONSOLIDATED) (A$) 1,980,571
WEIGHTED AVE. CONSOLIDATED CURRENT INDEXED LVR (%) 60.89
WEIGHTED AVE. SEASONING (MONTHS) 39
WEIGHTED AVE. REMAINING TERM (MONTHS) 313
NSW&ACT / VIC / QLD / SA / WA / TAS / NT (%)
46.69 / 31.11 /
0.09 / 5.65 /
13.54 /1.66 / 1.26
TOTAL OUTSTANDING IN BENCHMARK
FORMAT (US$M EQUIV.)
7,108
(US$M EQUIV.)
464
Guy Volpicella, Head of Structured Funding and Capital, Group Treasury / +61 2 8254 9261 / gvolpicella@westpac.com.au
John Georgiades, Director, Structured Funding and Capital, Group Treasury / +61 2 8253 1053 / johngeorgiades@westpac.com.au
FOR FURTHER INFORMATION PLEASE CONTACT: www.westpac.com.au
Detailed course information
and registration is available
on our website:
www.securitisation.com.au

ASF 2012 PROFESSIONAL
DEVELOPMENT COURSE DATES
ASF DIPLOMA OF
SECURITISATION
Brisbane
14-15
June
APPLIED WORKSHOP:
ADVANCED
ACCOUNTING
& TAX ISSUES
Sydney
30
July
SECURITISATION
FUNDAMENTALS
Brisbane
APPLIED CORE
MODULE
Sydney
15 25
June June
APPLIED WORKSHOP:
PRINCIPLES OF
CREDIT ANALYSIS
Sydney
26
ASF DIPLOMA OF
SECURITISATION
Melbourne
23-24
July
ANNUAL
CONFERENCE
Sydney
22-23
SECURITISATION
FUNDAMENTALS
Melbourne
25
July
AUSTRALIAN
COVERED BONDS
Melbourne
1
August
APPLIED WORKSHOP:
CONTEMPORARY
LEGAL & REGULATORY
DEVELOPMENTS
Sydney
13
August
13
August
September
AUSTRALIAN
COVERED BONDS
Sydney
22
August
ASF
DIPLOMA OF
SECURITISATION
Sydney
14-15
August
SECURITISATION
FUNDAMENTALS
Sydney
October
20
August
APPLIED WORKSHOP:
TRUSTEE ROLE,
RESPONSIBILITIES &
RELATIONSHIPS
Sydney
Pepper Australia Group would like to thank our investors and
key advisors on the successful completion of
Pepper Residential Securities Trust No.9 (PRS9).
Pepper Residential Securities Trust No.9 (PRS9)
A$300,000,000
Non-Conforming Residential Mortgage-Backed Securities Issue - May 2012
A$72,000,000 Class A1 Notes AAA(sf)/AAAsf
A$13,500,000 Class B Notes AA(sf)/NRsf
A$12,600,000 Class C Notes A(sf)/NRsf
A$9,600,000 Class D Notes BBB(sf)/NRsf
A$6,000,000 Class E Notes BB(sf)/NRsf
A$2,400,000 Class F Notes B(sf)/NRsf
A$7,500,000 Class G Notes Not Rated
Thank you
Trustee
Joint Lead Manager Arranger and Joint Lead Manager
Legal Advisor to Pepper

ASJ #2 May 2012

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AS

BARRY Im sure issuers will agree that the Australian

MCCUSKER Within the global cash portfolio at State Street

PAEZ The nature of our business gives us a different

MCCUSKER A lot of our demand comes from

PAEZ Given the way we manage our structured finance

BARRY We are trying to build the level of engagement. There

GARVEY ME Bank has been quite lucky in that we have had

TWYFORD While the cost element of borrowing offshore

LIPPA We have found that there

TWYFORD Its a blend. Some investors have a preference for

MCCUSKER Extension risk

PAEZ We think there is room for

PAEZ It may be a question

BARRY Master trusts are

LIPPA Thats exactly right. What ME Bank created in its last

GARVEY Getting a master trust structure established is an

TWYFORD It takes the complexity out of structuring. ME Bank

GARVEY I think the industry is in an interesting position.

TWYFORD It depends on the structure of the individual

BARRY We have established that there is demand in the

BARRY That puts the Australian banks in quite a strong

GARVEY It is useful to work with a bank, as was the case with

MCCUSKER Naturally we monitor the headline news about

PAEZ I agree with all those points. When you look

PAEZ If you look at the levels of loan-to-value ratios

MCCUSKEROne thing that

PAEZ Credit enhancement is obviously a key component

MCCUSKERThe revolving nature of the mortgage pool

GARVEY It doesnt vary too much from what we have just

TWYFORD There is a good level of understanding

BARRY It is true that there has been a recurring question

LIPPA There is also a perception that Australia has a high-

TWYFORD Australian households have taken note of the

Third edition of ASJ to be published

Implementation of G20 principles and

Co-chairing the IOSCO Task Force on

Working with the peak industry body,

In November 2011 the Reserve

MAIDMENT From our perspective covered bonds are

BRUNTON I think Simon Maidment is right: it felt at the back

HANNA Covered bonds provide another

PLATER Another aspect is that structurally there is a big

CASEY Before the deal we were certainly wondering exactly

CASEY Part of the feedback was that we should make sure

VERLANDER From a lead manager perspective we want

MAIDMENT The Australian dollar market is a closed market

TUTTLE We are in the market right now, bringing a non-

PLATER Our mandates are such that we can be predisposed

HANNA From our perspective non-conforming is more

BRUNTON I would be surprised to learn that the prime

CASEY The point is at what stage the coupon on the RMBS,

BRUNTON Our view is that the subordinated section of the

MAIDMENT But there is still a huge amount of cash that

BRUNTON Im sure some of it is to do with the underweight

PLATER We are reasonably comfortable with the current state

HANNA The potential to provide some homogeneity through

BRUNTON Its interesting if I can sell it at the level at which

MAIDMENT Were those secondary market purchases from the

BRUNTON Yes. But what it means is that clients are now

BRUNTON That could be a path. If covered bonds keep coming

MAIDMENT Creating more end-user demand for the product

HENDRY It is more intensive for intermediaries to make sure

MINEEFF We can work around that in some ways, but there