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RMBS Investment Program
Investor Update, September 2010
2
Important Notice
The views expressed in this presentation are commentary only, and should not be considered as advice. You should not act in reliance upon the views expressed in this presentation, but should seek independent advice in relation to these issues. The Commonwealth of Australia and the authors disclaim responsibility for loss or damage suffered by any person relying directly, or indirectly, on this presentation, including in relation to negligence or any other default.
Operational Notices on the AOFM website (www.aofm.gov.au) are the authoritative statements of the AOFM’s requirements and procedures for RMBS transactions and this presentation should not be taken as modifying these Notices in any way.
3
The AOFM• The Australian Office of Financial Management
(AOFM) is a specialist Australian Government agency responsible for:• management of Australian Government debt• the Government's cash balances• investing in financial assets
• The AOFM is:• Part of the Treasury portfolio• Accountable to the Treasurer and through him to
the Australian Government, the Parliament and the public
4
The RMBS Investment Program
• Program Chronology• Program Objectives• AOFM Strategy• Program Requirements
• Assessment Criteria• Minimum Eligibility Criteria
• Investment Process• AOFM Investments (to date)• Pricing• Outlook
Program Timeline
* ADI = Approved Deposit-taking Institutions (prudentially regulated financial institutions)
5
Policy Implementation (AOFM)Sep-Oct 2008 • Government announces a range of
measures to support Australia’s financial system
3 Oct 2008 • AOFM directed to invest up to A$4 billion in RMBS
13 Oct 2008 • AOFM “request for proposal” / tender approach commences
16 Oct 2008 • AOFM directed to invest a further up to A$4 billion in RMBS issued by non-ADI* lenders21 Nov 2008 • Settlement of first AOFM RMBS investment
Sep-Oct 2009 • Market consultation in relation to further support for RMBS issuance
30 Nov 2009 • AOFM directed to invest up to a further A$8 billion in RMBS (Phase 2)
7 Dec 2009 • AOFM “reverse enquiry” approach commences
8 Dec 2009 • AOFM “serial arrangement” RFP
Program Objectives• AOFM to invest up to A$16 billion in RMBS to support:
• competition in residential mortgage lending from a diverse range of lenders
• support small business lending (Phase 2)
• The AOFM does NOT:• Invest in secondary RMBS or ABCP• Invest in other classes of ABS• Aim to clear out mortgage warehouses• Support primary issues other than through direct
investments
6
AOFM Strategy• The primary objective is to support competition in
mortgage lending and lending to small business
• Program is temporary
• Aim to meet the program objectives without “leaving a legacy in the market”
• Allow market to function as “normal” as possible
• Closely monitor market conditions
• Support structures that engage other investors
7
Program Requirements• RMBS issuance is currently supported through two
channels• Serial Arrangement• Reverse Enquiry
• Issuers eligible to lodge proposal• Have issued RMBS in Australia before• Intend to remain active funding new mortgages
through securitisation• Lodged by an eligible arranger
• Proposal Assessment Criteria
• Minimum Eligibility Criteria
8
Serial Arrangement• AOFM offered to invest in a series of RMBS issues
• Mandates totalling up to A$3.4 billion allocated to:• AMP Bank• Firstmac• Liberty Financial• ME Bank• Resimac
• Issues must price by 15 December 2010
• AOFM can purchase up to 50% of eligible AAA securities offered, up to 75% of a tranche
• Lenders can “opt out” and use reverse enquiry channel
9
Reverse Enquiry
• Proposals can be submitted to AOFM when ready to go to market
• As not a tender process can have two way dialogue with issuers / arrangers on deal structures
• Program does not have an end date
• No restriction on AOFM participation volumes or % of a tranche; determined by AOFM for each proposal
• Not available to issuers with serial arrangement (though they can “opt in”)
10
Assessment Criteria• The extent to which the funds raised will be used for
new residential lending, or loans to small business, rather than clearing warehouses / balance sheets
• Historical reliance on RMBS
• The expected participation of other investors
• Timing of the issue to avoid congestion
• The experience and capability of the arranger
• The capabilities and quality of the asset servicer
• The overall quality of the mortgage pool and securities on offer
11
Minimum Eligibility Criteria• Both channels have the same minimum eligibility
criteria which include:
12
Minimum Eligibility RequirementsSecurities • “AAA” rated by at least two agencies
• A$ denominated
Mortgages (at cut off date)
• Prime• A$ denominated• Maximum loan size A$750,000• Maximum LTV 95%• Maximum term to maturity 30 yrs• Maximum interest only period 10 years• Days in arrears <30 days
Low doc loans are eligible
• Prime• Additional loan level requirements where low doc are >10% of pool
• Not a PAYG/salaried borrower, maximum consolidated borrower exposure of A$1 million, maximum LTV of 80%, mortgage insured
13
Minimum Eligibility RequirementsPool • Closed pool
• Maximum 50% interest only loans
Mortgage insurance
• Don’t need to be mortgage insured but must be “Mortgage Insurable”
Audit • Sample audit of compliance with minimum requirements• Tie back of sample of loans in the pool to source loan documentation
Reporting • Monthly
Minimum Eligibility Criteria cont.
Investment Process
• AOFM does not underwrite the pricing of issues. We may have discussions around price with issuers to assist them in refining the capital structure
• When we agree to support a transaction:• We disclose support of a transaction on our
website• We indicate to issuer/arranger the maximum
amount we may invest and any limits, including the maximum percentage or amount of a tranche we may invest (this is not disclosed to market)
• During book build we may bid for an allocation of RMBS alongside other investors in the transaction
14
Investment Process
• We require that for any investments by the AOFM:• Tranche pricing and volume is disclosed at pricing• AOFM website updated after settlement
• Deals to date supported by AOFM:• 35 issues• 16 lenders• Total RMBS issuance supported A$23.1 billion• AOFM investments of A$11.0 billion (48% of
supported issuance)
15
Pricing Rationale
• The volume and price bid by the AOFM for a particular security will take into account:• the extent to which the issue will contribute to the
Program's objectives• credit and structural characteristics of the security• expected WAL• pricing relative to other AOFM RMBS investments• current market conditions• other investor demand for the security
16
Pricing – AAA senior RMBS
17
0
50
100
150
200
250
300
350
400
450
500
Aug 06 Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 May 10
BpsPrimary RMBS Primary RMBS (AOFM sponsored) Secondary RMBS
Source: RBA, RBS
Pricing Rationale cont.
• Primary market stalled in March-April 2010
• AOFM sought to restart market in May 2010• Anchoring long tranches to facilitate creation of short tranches• Tighter pricing – driving competition in the mortgage space
• AOFM seeks to limit interest to 1 or 2 tranches• But will put a clearing bid into a short tranche
18
19
AOFM Investments
Source: AOFM
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Firs
tmac
2-2
008
SM
HL
2-20
08
CM
S 2
008-
2
RE
SIM
AC
200
8-1
TOR
RE
NS
200
9-1
Har
vey
Trus
t 200
9-1
Pro
gres
s 20
09-1
RE
DS
200
9-1
Libe
rty 2
009-
1
CM
S 2
009-
1
SM
HL
2009
-1
RE
SIM
AC
200
9-1
Firs
tMac
1-2
009
Wid
e B
ay 2
009-
1
Ligh
t Tru
st 2
AP
OLL
O 2
009-
1
GB
S N
o 4
Libe
rty 2
009-
2
RE
SIM
AC
200
9-2
Firs
tMac
2-2
009
Pro
gres
s 20
10-1
RE
DS
201
0-1
Har
vey
Trus
t 201
0-1
SM
HL
2010
-1
Torre
ns 2
010-
1
Illaw
arra
201
0-1
Res
imac
201
0-1
(Low
doc
)
AP
OLL
O 2
010-
1
SM
HL
2010
-2E
TOR
RE
NS
201
0-2
Con
Que
st 2
010-
2
Libe
rty 2
010-
1
RE
DS
201
0-2
PU
MA
P-1
6
Firs
tMac
1-2
010
A$ millionAOFM Investment Private (incl. retained)
2008 H2: 76% 2009 H1: 78% 2009 H2: 47% 2010 H1: 22% 2010 H2: 33%
0%
20%
40%
60%
80%
100%
Firs
tmac
2-2
008
SM
HL
2-20
08
CM
S 2
008-
2
RE
SIM
AC
200
8-1
TOR
RE
NS
200
9-1
Har
vey
Trus
t 200
9-1
Pro
gres
s 20
09-1
RE
DS
200
9-1
Libe
rty 2
009-
1
CM
S 2
009-
1
SM
HL
2009
-1
RE
SIM
AC
200
9-1
Firs
tMac
1-2
009
Wid
e B
ay 2
009-
1
Ligh
t Tru
st 2
AP
OLL
O 2
009-
1
GB
S N
o 4
Libe
rty 2
009-
2
RE
SIM
AC
200
9-2
Firs
tMac
2-2
009
Pro
gres
s 20
10-1
RE
DS
201
0-1
Har
vey
Trus
t 201
0-1
SM
HL
2010
-1
Torre
ns 2
010-
1
Illaw
arra
201
0-1
Res
imac
201
0-1
(Low
doc
)
AP
OLL
O 2
010-
1
SM
HL
2010
-2E
TOR
RE
NS
201
0-2
Con
Que
st 2
010-
2
Libe
rty 2
010-
1
RE
DS
201
0-2
PU
MA
P-1
6
Firs
tMac
1-2
010
AOFM participation rate Last 6 deal rolling average Last 6 deal rolling average (adjusted for non-supported issuance)
20
AOFM Investments - Participation Rate*
Source: AOFM* Includes retained tranches
21
AOFM Investments – WAL (senior AAA)
0
1
2
3
4
5
6
7Fi
rstm
ac 2
-200
8S
MH
L 2-
2008
CM
S 2
008-
2R
ES
IMAC
200
8-1
TOR
RE
NS
2009
-1H
arve
y Tr
ust 2
009-
1Pr
ogre
ss 2
009-
1
RE
DS
200
9-1
Libe
rty 2
009-
1C
MS
200
9-1
SM
HL
2009
-1R
ES
IMAC
200
9-1
Firs
tMac
1-2
009
Wid
e B
ay 2
009-
1Li
ght T
rust
2AP
OLL
O 2
009-
1G
BS
No
4
Libe
rty 2
009-
2R
ES
IMAC
200
9-2
Firs
tMac
2-2
009
Prog
ress
201
0-1
RE
DS
201
0-1
Har
vey
Trus
t 201
0-1
SM
HL
2010
-1To
rren
s 20
10-1
Illaw
arra
201
0-1
Res
imac
201
0-1
(Low
doc
)
APO
LLO
201
0-1
SM
HL
2010
-2E
TOR
RE
NS
2010
-2C
onQ
uest
201
0-2
Libe
rty 2
010-
1R
ED
S 2
010-
2P
UM
A P
-16
Firs
tMac
1-2
010
Years
WAL (AOFM) WAL (Other)
Source: AOFM
22
Pricing – AAA RMBS
0
20
40
60
80
100
120
140
160
180
200
220
240
0 1 2 3 4 5 6 7 8WAL
Bps
ADI Non-ADI Non-AOFM
Mezz AAA"AB" tranches
Adjusted pricingmethodology
Source: AOFM
Sale of AOFM investments• AOFM is authorised to adjust its holdings of RMBS
• In March 2010, the AOFM sold a small portion of its holdings (A$73.79 million) for portfolio management purposes
• After conditions in the primary market have improved, AOFM has discretion to sell or hold to maturity. Sales should be undertaken without causing market volatility
• The AOFM has no current plans to undertake further sales of its portfolio
23
Outlook• AOFM has up to A$5.02 billion remaining of the $16 billion
program to be invested (with some allocated to serial arrangements)
• AOFM is supportive of further decreases in the cost of RMBS issuance across the capital structure
• Decrease in headline RMBS spreads• Capital structures to meet private investor demand with
complementary investment from AOFM• Support for cross border / foreign currency issues (but
only via A$ tranches)• Other innovations will be explored as they arise
24
25
Further InformationWebsite www.aofm.gov.au/content/rmbs.asp