- May 25, 2010
Suncorp Metway CDS rising from the South (as Auzzie RMBS emerges from down under)
Australia’s 5th largest bank and 2nd largest property & casualty insurer has seen its credit default swaps rise to new local highs of 180 bps, or up about 20 bps, today after announcing it was launching a new A$500 million Australian residential mortgage-backed security (Auzzie RMBS) issue led by Deutsche Bank and Macquarie today in Sydney trading. The stock also closed down almost 3% to A$8.06.
Suncorp Metway had left the mortgage business 2 years ago after bad mortgage loans (commercial and residential) almost took down the bank and it was forced to cutback in order to re-focus on consumer deposits. Competition in mortgage lending declined and issuance became dominated by the big 4 Auzzie banks and foreign banks with major domestic subsidiaries. Now, with markets bouncing back and performance improving somewhat, it intends to get back in.
The Australian government will be bidding on the entire A$150 million Aaa-rated 6-year A2 tranche of the APOLLO 2010-1 deal at an indicative 110-130 bps price talk level over BBSW (bank bill swap rates). Pricing is expected by June 1, 2010. The government bid, through the Australian Office of Financial Management (AOFM), is part of Australia’s continued support for its securitization markets and Australian RMBS. The A$16 billion RMBS purchase plan began in 2008 and has so far invested A$8.7 billion in 27 issues.
Investors are worried about whether there is enough foreign and private (non-government) demand for the bonds. Before the financial crisis, overseas investors accounted for 60-70% of investment in the A$173 billion Auzzie residential mortgage backed security market (world’s fourth largest) while current levels are only around 20-30%. AOFM initially made up most of this difference accounting for 70-80% of investment at the height of the crisis but their participation has since decreased to only 20% with a few deals already having been completed without AOFM participation. These lower participation rates, however, are at significantly lower volumes as the Australian RMBS market saw A$57 billion in issuance in 2006 compared to A$6 billion in 2008 and A$4.5 billion year-to-date. AOFM already stated that it is willing to continue investing even at tighter levels but private investors are more trepid and appear to be more comfortable in the previous 130-135 bps range given relative opportunities in other investment grade bonds.
Price talk on the A$350 million 1.5-year A1 tranche is around 100 bps over BBSW and is expected to be well bid (without government participation). The 110-130 bps talk on the A2 tranche is significantly tighter than just 2 months ago when Macquarie reportedly privately placed a A$898.7 million 2.9-year AAA-rated PUMA Masterfund S-8 A2 class at 165 bps over 1-month BBSW. The 0.2-year A1 tranche priced at 80 bps over 1-month BBSW. That issuance was the first new issuance out of PUMA since 2008.
Separately, Suncorp Metway held an investor day and announced last week its intention to raise general insurance margins by 3% over 2 years. General insurance accounted for 80% of Suncorp’s profit and had an operating margin of 12.8% over the 6 months ended Decmeber 2009.