Westpac eyes a return to NZ$1 bln a year glory days of the RMBS market

  Westpac eyes return to glory days of securitised mortgages market.

The NZ$100 million Residential Mortgages Backed Securities (RMBS) issue announced by NZF Group this week may be the tip of the iceberg with a market closed for almost three years springing back into life.

NZF's first RMBS offer - open only to institutional investors - is New Zealand's first issue of this type of securities since late 2007. The market, as Rod Smith, head of debt capital markets at Westpac Institutional Bank puts it, effectively closed down through the global financial crisis. Westpac is both arranging and acting as lead manager for NZF's offer.

RMBS are a type of security whose cash flows come from interest payments made on residential mortgage debt, and which are secured over the property. Standard & Poor's describes the collateral in NZF's RMBS offer as fully amortising New Zealand dollar loans to prime-quality borrowers.

Smith says Westpac has led 16 of the 18 RMBS deals done in New Zealand and estimates there are between NZ$600 million and NZ$700 million worth of RMBS still on issue. Further issues are in the pipeline.

"We anticipate bringing another deal in July for a different mortgage originator that I can’t name just now," Smith said. "We’d be confident of that going well. It’s a pretty well known name."

And John Callaghan, NZF Group managing director, told interest.co.nz the offer was a launch board for NZF with plans for further offers later in the year.

NZF Group, half owner of Mike Pero Mortgage Holdings and 70% owner of Finance Direct, is offering NZ$100 million worth of RMBS's with the top two tranches of the offer - A1 and A2 - comprising a combined 97% of the offer, carrying a S&P AAA credit rating. The second ranking part of the offer, B, valued at NZ$2.5 million, carries an AA- rating with the final slice, C, the equity, unrated. Click here to read S&P's ratings report.

The loan pool NZF is drawing on totals 342 loans with a total value of NZ$99.67 million. The average loan size is NZ$291,436 and they've been running, on average, for 26 months. Some 40% of the loan pool is comprised of properties in non-metropolitan areas. The income of the borrower not fully verified in 43% of the loans, making them low-doc loans. The pool is closed so no additional loans will be assigned. The offer will be priced in the week starting June 7 and is expected to settle on June 15.

Smith said pricing on the A1, or top tranche, of the offer will probably be "slightly wider" than the average of about 130 basis points over the swap rate currently on offer on RMBS deals in Australia. The pricing on the A2, or second tranche, may not be disclosed with this depending on the sentiment of the investors' who buy it. And, as is normal with an RMBS offer, the pricing of the lowest ranking slice definitely won't be disclosed. The weighted average life on the top tranche of the offer is 2.7 years and the issue has a call date of five years. This means any bonds still on issue in five years time will be called in by NZF and repaid.

Callaghan said NZF would use the money raised to grow its business.

"There is a lot of opportunity in the residential mortgage space now in New Zealand, margins are wider and the interest from institutional investors in this type of product is growing again," Callaghan said.

Meanwhile, Smith said Westpac was "delighted" the RMBS market had reopened and it hoped to arrange more deals.

"At its peak in 2004 we arranged about NZ$1 billion of RMBS so we’d like to see the market getting up to that sort of number again," Smith added.

However, Smith said no RMBS offers were likely to target retail investors because it was hard to articulate the risks.

Grant Hassell, head of fixed income at AMP Capital Investors, said as an investor he was also glad to see the RMBS market reopen. He liked the product because of the high level of security typically offered. However, AMP was unlikely to invest in the NZF securities because it was largely fully invested and wanted to see some settling down of Europe's sovereign debt crisis before it started investing again. With the Budget now behind us, Hassell suggested there was more certainty in the property market in terms of tax, but with the Reserve Bank expected to kick off a new interest rate hiking cycle within a couple of months, this might put a bit of pressure on property values.

"Overall [though] I think mortgage backed securities are a reasonable thing to be investing into," said Hassell.

News of NZF's RMBS issue comes hot on the heels of the company flagging a goodwill write-down of up to NZ$7 million, or about 50%, of its carrying value for Mike Pero Mortgage Holdings. In its last financial results, covering the six months to September 2009, NZF, made a profit from continuing operations of NZ$2 million versus a loss of NZ$3.4 million in the same period of the previous year. Its loans to customers totaled NZ$269 million. NZF's home loans are funded through a NZ$225 million Westpac loan facility which expires in October.

 This article was first published yesterday in our paid subscriber email for bank executives, regulators and other industry experts. Subscribe here or email bernard.hickey@interest.co.nz