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SecuritisationSecuritisation as an as an Alternative Funding ToolAlternative Funding Tool
May 2007May 2007
Roger DesmarchelierChief Manager Group Securitisation
St George Bank
AgendaAgenda
Why Securitise
Growth of global securitisation
What assets have been securitised.
Securitisation structuring
Global distribution of Australian securitisation
Australian Securitisation Forum
Why Why SecuritiseSecuritise? ?
Balance sheet managementCan improve return on capital, may achieve off balance sheet funding, may release unproductive capital invested on low margin assets, can facilitate balance sheet restructuring.
Diversification of funding sourcesOpens up access to new investor bases and funding sources that can provide resilience in times of liquidity crises.
Why Why SecuritiseSecuritise? (cont.)? (cont.)
Enhance liquidityTransforming illiquid asset pools into marketable securities that when transferred into cash, can enhance originator liquidity.
Reduce cost of fundsFor lower rated originators, securitisation can often achieve a lower cost of funds than raising debt in their own name.
Enhance strategic profileAn originator who may want to enhance their profile in the capital markets, often with a view to tapping into the market in their own name at some later stage, may choose to build up recognition and track record through a securitisation program.
Why Why SecuritiseSecuritise? (cont. 2)? (cont. 2)
Manage and match asset/liability profileSecuritisation transactions often issue pass-through securities, whose repayment obligations effectively match the repayment characteristics of the underlying assets.
Transfer risk and cap the originator’s credit riskBy securitising assets, some or most of the credit risk of those assets can be transferred to investors, with the originator’s exposure limited to the portion that it retains as credit enhancement.
Encourage best practiceThe process of securitisation opens up originators to external review by bankers, investors, lawyers, accountants, trustees andrating agencies. This can often provide originators with insights into market best practices.
Growth of Growth of SecuritisationSecuritisation
Securitisation has become a major part of capital markets around the world, often dwarfing more traditional vanilla capital markets issuance from companies and banks.
Australian debt capital markets 2006 by volume
Corp/Fin36%
ABS45%
Kangaroo19%
ABS Growth by SectorABS Growth by Sector
USA
0
200
400
600
800
1000
1200
1400
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
USD
(bn)
0%
10%
20%
30%
40%
50%
60%
Grow
th R
ate
CardsOt herA ut osSt udent loanM anuf d HsEquipm entHom e eqGrowt h
(Barclays Capital 2007)
ABS Growth by SectorABS Growth by Sector
Europe
0
100
200
300
400
500
600
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007YTD
USD
(bn)
0%
20%
40%
60%
80%
100%
120%
Grow
th R
ate
Whole Business
Consumer
CMBS
Other
RMBS
Growth Rate
(Barclays Capital 2007)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
(A$
mill
ions
)
AUD 4,686 6,609 12,410 15,927 18,736 22,546 31,249 37,884 9,138Euro 6,162 3,052 2,129 1,034 3,418 13,749 8,657 11,414 4,120USD 2,890 6,372 13,647 13,959 21,552 18,540 9,033 13,376 6,558
1999 2000 2001 2002 2003 2004 2005 2006 2007 ytd
Australian Securitisation growth
(Standard & Poors 2007)
What Assets Have Been Securitised?What Assets Have Been Securitised?
Commercial propertyPredictable
cash flows
Residential housing Loans
Small-ticket commercial
loans
Car loans & leases
Equipment leases
Net interest margin flows
Margin loans
Trade receivables
Credit card receivables
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000(A
$ m
illio
ns)
ABS 3,121 2,103 1,381 2,585 1,963 3,280 2,018 3,752 2,126CMBS 343 505 1,530 3,108 2,877 1,833 2,263 5,161 0RMBS 13,738 16,033 28,186 31,841 44,694 57,995 50,587 62,654 20,565
1999 2000 2001 2002 2003 2004 2005 2006 2007 ytd
Australian Issuance: Summary by Asset ClassAustralian Issuance: Summary by Asset Class
Standard & Poors.2007
Key Characteristics of Key Characteristics of SecuritisationSecuritisation StructuresStructures
Requires the establishment of a Special Purpose Vehicle, (SPV), into which the underlying assets are transferred.
Requires credit enhancement to support the timely payment of principal and interest.
Requires cash flow enhancements, such as liquidity facilities and swaps to mitigate timing, interest rate, basis and currency risks.
In some structures, requires substitution and eligibility criteria to replace original assets that repay.
Key fundamentals of Key fundamentals of securitisationsecuritisation..
Originator SPV
Obligors
Investors
Assignment of right to receive payments
Before After
Principal and interest
Credit EnhancementsCredit Enhancements
Purpose: To insulate investors from losses on underlying cash flows
(1) External credit enhancementMortgage insurance or credit wrap at asset-level and/or deal-level
(2) Internal credit enhancementSubordinated tranches
Overcollateralisation
Excess Servicing Margin
Cash Flow EnhancementsCash Flow Enhancements
Liquidity facilities: cash available to ensure payment on bonds is timely.
Basis Swaps: convert earnings on underlying assets to the same basis as the bonds.
Cross Currency Swaps: Exchanges AUD into other currencies.
Credit Credit TranchingTranching
Cash flow and loss allocation
Senior note
Mezz note
Junior note
Cash flow waterfall
Losses
1
2
3
1
3
2
Securitisation Securitisation –– General StructureGeneral Structure
SPV
Originator
Investors
Sale of assets
Purchase consideration
MBS / ABS debt securities
Subscription proceeds
Credit enhancement
Liquidity enhancement
Dealers
Manager
Trustee
Security trustee
Servicer
Rating agencies
Swaps
(Other facilities)
Choice of Issuance MarketsChoice of Issuance Markets
Domestic issuanceEasiest, cheapest and fastest option.
Investor proximity and familiarity with market, sector, and originator.
Very effective for mid size transactions.
Cross-border issuanceIncreases and diversifies the investor base.
Subject to availability and cost of currency swaps.
Investor comfort / familiarity with market, sector, and originator.
Cost and time of marketing transactions offshore.
Increased legal, listing and compliance costs.
Choice of Issuance Markets (cont.)Choice of Issuance Markets (cont.)
Domestic issueAn issue of debt securities in A$ issued into the Australian capital market. Investors may be domiciled outside of Australia.
Euro issueAn issue of debt securities to investors in the European markets.
US – 144A issueAn issue to investors in the US market pursuant to Rule 144A of the Securities Act of 1933 (US) which allows the resale of underwritten unregistered securities to “qualifying institutional buyers” without the need for a registration statement to be filed with the SEC.
US – SEC registered issue. Reg ABAn offer of securities to the public in the US which requires a registration statement to be filed with the Securities and Exchange Commission (SEC) before any securities are offered to the public. Generally a shelf registration programme
Australian RMBS Distribution in 2006Australian RMBS Distribution in 2006
Australian ABS to the USA
45% of USD denominated deals
2% of Euro denominated deals
Australian ABS to Europe
40% of A$ denominated deals
45% of USD denominated deals
95% of Euro denominated deals
Australian ABS to Asia
15% of AUD$ denominated deals
10% of USD denominated deals
3% of Euro denominated deals
Summary of Benefits of Securitisation Summary of Benefits of Securitisation
Provides funding diversity.
Enables match funding.
Gives a reduction in regulatory capital.
Enhances strategic profile in the global markets.
Encourages best practice.
Enhances liquidity.
Shaping the Shaping the SecuritisationSecuritisation MarketMarket
“To shape the future of the Australian Securitisation Market for the ongoing benefit of our members”.
ASF SASF Strategictrategic GoalsGoals
AdvocacyTo anticipate and influence regulatory changes with a view to establishing and advancing the interests of the securitisation industry.
Investor engagementTo broaden the investor base and to increase the allocation to Australian securitised products in portfolios.
EducationTo achieve a high level of understanding and competence for the participants in the Australian securitisation industry.
Securitisation. Where from Here?Securitisation. Where from Here?
New asset classes
CLO/CDO synthetic structures
Covered Bonds?
Non LMI/senior/sub
RMBS structures
Acct./ Regulatory Changes
New Issuers
Basle 11 impacts
APS 120 impacts
Securitisation Securitisation InformationInformation
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www.securitisation.com.au
www.americansecuritization.com
www.europeansecuritisation.com