Purchase of RMBS – Request for Proposals

13 October 2008

Operational Notice: No. 10/2008

Purchase of Residential Mortgage-Backed Securities (RMBS) – Request for Proposals

On 26 September 2008 the Treasurer announced that the AOFM will purchase residential mortgage-backed securities (RMBS) to support competition in Australia’s mortgage markets. Up to $8 billion is available for investment, with at least $4 billion to be allocated to issuer/originators that are non-authorised deposit taking institutions.

This notice details the arrangements for the purchase of RMBS by the AOFM and invites the submission of proposals from arrangers of RMBS issues.

Following consultations with participants in the RMBS market it has been decided that the AOFM will allocate mandates to arrange the issue of RMBS with the AOFM as a ‘cornerstone investor’. These mandates will be allocated over time to avoid congestion.

  • The AOFM will conduct a series of selection rounds to allocate mandates.
  • Mandates will be awarded to transaction sponsors comprising an arranger/lead manager and an issuer/originators in combination. Arrangers must be members of the AOFM Investment Facility dealing panel.
  • The RMBS securities will need to meet minimum standards specified by the AOFM.
  • Proposals will be assessed using criteria related to the contribution they will make to maintaining competition in housing lending.
  • The granting of mandates will be staggered to avoid congestion in capital markets and with the ratings agencies.
  • Mandates will be open for specified periods to provide time for issues to be marketed and launched.
  • The pricing of an issue will be determined by the parties to the issue at the time the deal is closed.

Attached to this notice is a Request for Proposals (RFP) for the first selection round.

  • The first selection round is for RMBS issues that are expected to be priced and placed with investors between early November and end-December 2008.
  • The amount invested by the AOFM in any one issue will take account of the characteristics of the issue and the size of the contribution by other investors, with a minimum investment by the AOFM of $200 million and a maximum of $500 million.
  • Up to four mandates may be awarded to transaction sponsors as part of this first selection round. One or two mandates to commence immediately will be awarded and up to two additional mandates to commence after mid-November 2008.

Arrangers not in a position to price and place an issue prior to end-December 2008 should not lodge a proposal at this time. It is expected that the RFP for the second selection round will be issued in November 2008. This will be for issues to be completed by February or March 2009. To maximise the benefits of the RMBS purchases and promote participation by a wide range of mortgage originators, the requirements specified by the AOFM for RMBS issues may be varied for subsequent selection rounds.

While each of the first round mandates will be awarded to different issuer/originators, it is possible that the same arranger/lead manager may be part of more than one mandate.

  • Once mandates have been awarded, it will be up to each mandated issuer/originator whether co-lead managers will be appointed to each transaction.

 


 

Attachment

Request for Proposals (RFP) – Purchase of RMBS by AOFM

Background

Over the past 15 years, the market for residential mortgage-backed securities (RMBS) has provided an important source of funding for new and smaller mortgage lenders to compete with the major banks. However, developments in international capital markets since mid-2007 have had an impact on the Australian RMBS market, reducing liquidity in the RMBS market and constraining the ability of lenders to access funding from this source.

The Australian Government has decided to invest temporarily in Australian RMBS to support competition from a diverse range of lenders during the present market dislocation. To this end the Australian Office of Financial Management (AOFM) has been directed to invest up to $8 billion in Australian RMBS, with at least $4 billion being allocated to issuers/originators that are non-authorised deposit taking institutions.

This document outlines arrangements for the lodgement of proposals for the first selection round for the allocation of mandates to arrange the issue of RMBS with the AOFM as a ‘cornerstone investor’.

  • This selection round is for RMBS issues that are expected to be priced and placed with investors prior end-December 2008.
  • The amount invested by the AOFM in any one issue will take account of the characteristics of the issue and the size of the contribution by other investors, with a minimum investment by the AOFM of $200 million and a maximum of $500 million.
  • Up to four mandates may be awarded, but taking account of the need to avoid congestion in capital markets and with the rating agencies. One or two mandates to commence immediately will be awarded and up to two additional mandates to commence after mid-November 2008.

Eligibility to Lodge Proposal

Proposals may only be lodged by arrangers/lead managers that are members of the AOFM Investment Facility dealing panel (current panel members are listed at Appendix 1) on behalf of issuers that have previously securitised residential mortgages in Australia and intend to remain active in funding new mortgages through securitisation.

Proposals for this round may be lodged by arrangers on behalf of both ADI and non ADI issuers.

Indicative Timing

Proposals should be lodged only for issues that are expected to be priced and placed by end-December 2008. Settlement could, if necessary, be deferred until January 2009.

The closing date for lodging proposals is 24 October 2008 (see below). The AOFM will assess the proposals and may discuss them with arrangers.

Proposals should provide for pricing and placement by either mid-November 2008 or end-December 2008.

Selection Criteria

Proposals will be evaluated in terms of the contribution they will make to maintaining competition in housing lending using the following criteria:

  • The extent to which the funds raised from the proposed issue will be used to originate new residential mortgages in the near term, rather than simply clearing warehouse facilities or reducing balance sheets. Proposals should indicate what, if any, undertakings relevant parties connected with the issue are prepared to make in this regard (for example, in relation to continued future access to warehouse facilities).
  • The extent to which the mortgage originators associated with the proposed issue have relied on RMBS to finance their lending for residential housing in the past.
  • The expected participation of other investors in the proposed issue.
  • The experience and capability of the arranger/lead manager in relation to RMBS issues.
  • The extent to which the proposal will avoid congestion with other proposals. This may be relevant to the number of proposals to be selected in this round. Arrangers should indicate the groups of investors likely to participate and any special factors which may facilitate consideration of the proposal by ratings agencies.
  • The capabilities and quality of the asset servicer.

Minimum Requirements

All proposals must be consistent with the requirements detailed below. The AOFM will reject proposals that do not meet these requirements.

  • The securities offered to the AOFM should be expected to obtain an AAA credit rating. This rating will need to be confirmed by at least two of the major credit rating agencies before settlement of the issue.
  • Austraclear lodgement and settlement of the securities.
  • The following minimum requirements apply in relation to the mortgage pool:
    • Australian dollar denominated loans that are mortgage insurable.
    • Closed pool, no substitution or prefunding permitted.
    • Low documentation loans should not exceed 10% of the initial principal value of the mortgage pool.
    • Maximum loan size of $750,000.
    • Maximum remaining loan term to maturity of 30 years.
    • Weighted average Loan to Value Ratio (LVR) of not more than 70%.
    • Maximum LVR of 95%.
    • Interest only loans should not exceed 50% of the initial principal value of the loan pool.
    • Maximum interest only period of 10 years.
    • Days in arrears for an individual loan payment should not exceed 30 days.
  • Monthly reporting on the composition of the mortgages underlying the securities, including the proportions of prime full documentation and low documentation mortgages and regular reviews of the rating of the issue by the credit rating agencies.

Example of an Acceptable Structure

An example of an acceptable structure for a proposed RMBS issue is shown at Appendix 2.

Information to be Provided

Proposals must provide sufficient information, in the sole opinion of the AOFM, to enable the AOFM to determine if the conditions for participation are satisfied and to enable the AOFM to evaluate proposals against the evaluation criteria. The information provided should include:

  • Information indicating previous securitisation activity of the issuer(s) including summary details of RMBS issues undertaken over the last five years.
  • Information indicating current mortgage origination activity.
  • Expected timing for placement and pricing of the proposed issue.
  • An indicative term sheet for the proposed issue which should include details of:
    • Issuer;
    • Trustee;
    • Manager;
    • Servicer;
    • Back up servicer;
    • Arranger(s);
    • Interest payment details;
    • Proposed levels of credit enhancement and credit support arrangements.
  • Expectations in relation to participation by other investors in the proposed issue.
  • Summary information in relation to the expected mortgage pool to be securitised including but not limited to geographical distribution plus details of the current location of the mortgages (for example, on-balance sheet, warehouse facility).
  • An undertaking to report monthly on collateral and cash flows to ratings agencies, the trustee, wire services and arranging banks.
  • The undertakings the parties connected with the proposed issue are prepared to make in relation to use of the funds raised from the issue.

Lodging a Proposal

Proposals should be lodged by email to rmbs@aofm.gov.au, no later than 5.00 pm Australian Eastern Daylight Time, 24 October 2008.

AOFM Contacts

The AOFM contact for enquires concerning this RFP is:

Michael Bath

Director, Financial Risk

Telephone: (61 2) 6263 1136

Facsimile: (61 2) 6263 1222

Email: michael.bath@aofm.gov.au

 


 

Appendix 1

AOFM Investment Facility Dealing Panel

(Panel Members as at 13 October 2008)

ABN AMRO

Australia and New Zealand Banking Group

Bank of Scotland

Bank of Tokyo-Mitsubishi UFJ

BNP Paribas

Citigroup

Commonwealth Bank of Australia

Credit Suisse

Deutsche Bank

HSBC

ING Bank

JP Morgan Chase

Macquarie Bank

National Australia Bank

Royal Bank of Canada

Royal Bank of Scotland

Societe Generale

St. George Bank

Sumitomo Mitsui Banking Corporation

Suncorp-Metway

Toronto-Dominion Bank

UBS

Westpac Banking Corporation

 


 

Appendix 2

Example of an Acceptable Issue Structure

An acceptable issue structure is as follows:

  • Proposed issues with a minimum of 3 classes of securities, that is:
    • Super senior securities (Class A);
    • Senior securities (Class AB);
    • Subordinated securities (Class B).

The Class A securities will rank in priority in relation to the payment of interest and the repayment of principal.

The Class AB securities will rank behind the Class A securities in priority in relation to the payment of interest and in the repayment of principal (prior to an event of default).

The Class B securities will rank behind the Class A Notes and Class AB Notes in priority in relation to the payment of interest and in the repayment of principal.

  • The Class A and Class AB securities should be expected to obtain an AAA credit rating. This rating will need to be confirmed by at least two of the major credit rating agencies before settlement of the issue.
    • The Class A securities should be structured to obtain a AAA rating independent of lenders mortgage insurance while the AB Class securities should be structured to maintain their AAA rating assuming a 1 category downgrade of lenders mortgage insurers by S&P and Fitch, and a 3 notch downgrade by Moody’s.
  • In relation to proposals structured in this way and meeting the minimum requirements in the RFP, the AOFM would be prepared to invest in both the Class A and Class AB securities. The AOFM could be the sole investor in the Class AB securities.
  • At the time of issue pricing, the Class AB securities will be priced at a higher margin to one month BBSW than the margin to one month BBSW for the pricing of the Class A securities.

Last updated: 21 March 2014