The Australian structured credit market continues to buzz with activity, with a string of portfolio credit-linked notes launched over the past month. In early November, the Commonwealth Bank of Australia (CBA) launched a synthetic collateralised loan obligation (CLO) backed by a A$2.5 billion ($1.79 billion) pool of loans to small and medium-sized enterprises (SMEs), making it the first Australian bank to synthetically securitise its SME exposures, while Deutsche Bank and Australian bank Westpac have both launched deals tapping the country’s retail investors.
The CBA transaction is aimed at freeing up economic capital and re-balancing the risk in its SME portfolio, most of which is concentrated in the commercial property sector. “From our side, [the motivations] are credit relief and industry concentration relief. Regulatory capital isn’t really a focus because we hold more than required,” says Leanne Leong, general manager of securitisation at CBA in Sydney.
As part of the transaction, CBA will enter into a portfolio credit default swap with special purpose vehicle Medallion Trust, referenced to the A$2.5 billion portfolio comprising fully drawn loans, commercial bill facilities and overdrafts extended to 803 unrated small businesses.
Medallion Trust will then issue A$177.5 million of credit-linked notes, split into five tranches: A$19 million of Class A notes rated A+ and A1 by Standard & Poor’s and Moody’s Investors Service; A$72.5 million of Class B notes rated A-/A3; A$50 million of Class C notes rated BBB/Baa2; A$12 million Class D notes rated BBB-/Baa3; and A$24 million of Class E notes rated BB/Ba2.
CBA will retain the first loss tranche, worth A$22.5 million or 0.9% of the portfolio – an economic capital saving of 76%, according to the bank. An excess spread of 110 basis points is also included in the swap premium paid by CBA to Medallion Trust to cover credit losses.
Meanwhile, Deutsche Bank has tapped the market with its second Nexus Bond deal, aimed at the country’s retail investors. The six-year transaction comprises A$56 million of portfolio credit-linked notes rated BBB by Standard & Poor’s, which pay a coupon of 3.25% over the 90-day bank bill swap rate reset and paid quarterly. The transaction is referenced to a A$1.6 billion portfolio of at least 70 loans on the bank’s balance sheet, and investors are protected against the first 3.35% of losses.
Unlike the first Nexus Bond transaction, launched last December, the bank opted to get this deal rated. The reason is that while the first deal was an arbitrage transaction comprising recognisable household names, this deal is referenced to loans on Deutsche’s balance sheet, says Kevin Kosovich, director and head of integrated credit trading, in Sydney. “A public rating by Standard & Poor’s was obtained to assist prospective investors to determine the risk of investing in these notes relative to other investments they may make,” he adds.
Westpac also launched a balance sheet transaction aimed at retail investors in November. The deal, called Prise II, is referenced to more than 500 commercial property loans on Westpac’s balance sheet, worth A$600 million. The four-year structure comprises A$60 million of credit-linked notes, callable after three years, and investors are protected against the first A$12 million of losses on the portfolio. The notes pay 8.25% for the first three-years, stepping up to 9.25% for the final year if the notes are not called.
In a separate deal, the bank also launched A$50 million of credit-linked notes, referenced to a A$5 billion portfolio of 110 investment grade corporates. The five-year deal, called Wollemi Trust, is aimed at the country’s institutional investors. The notes are rated AAA by S&P and pay 85bp over the 90-day bank bill swap rate. The structure has a fixed recovery rate of 40%, meaning that nine defaults have to occur before investors lose principal. NS, SF