25 May 2010
This Operational Notice provides information on the AOFM’s approach to the pricing of its investments in RMBS in the interest of market transparency.
Under the RMBS Investment Program, the AOFM invests in RMBS at pricing levels that support competition for residential mortgage lending and to support lending to small business. Since the inception of the program it has invested around $8.7 billion in 27 RMBS transactions, sponsored by 14 different issuers. In making these investments, the AOFM has continually adapted its approach to changing market conditions.
RMBS market conditions have improved since the program’s inception, resulting in reductions in issuance costs for issuers and relatively high private sector investor participation in more recent transactions. Pricing of primary and secondary RMBS appears to have stabilised around current levels for an extended period. Given the high credit quality of Australian RMBS and the program objectives, the AOFM is willing to invest at tighter levels but this will continue to be balanced with the desire to encourage continued private sector participation in AOFM supported RMBS.
This change in approach is directed towards bringing about lower pricing in the primary RMBS market, which will further support competition for residential mortgage lending and support lending to small business.
The AOFM will continue to explore with other market participants other potential innovations to make RMBS a more competitive source of funding.
Application of the modified approach
Proposed APOLLO transaction
Today the AOFM announced that it has issued a letter of support in respect of a proposed RMBS issue arranged by Suncorp-Metway Limited (“Suncorp”); the APOLLO Series 2010-1 Trust.
Suncorp submitted a proposal pursuant to Operational Notice 25/2009 (“reverse enquiry”) in early May, which provided the AOFM the earliest opportunity to apply its modified investment strategy. After receiving the proposal, the AOFM requested Suncorp to consider modifying the capital structure of the proposed issue to assist the objectives of the RMBS Investment Program. Suncorp Bank agreed and details of the proposed issue of RMBS by the APOLLO Series 2010-1 Trust have been disclosed by Suncorp today. It is anticipated that this structure will allow the AOFM to invest in the issue at tighter levels in a way that complements a high proportion of private sector participation.
Subject to market conditions and the fulfilment of standard AOFM terms included in the letter of support issued to Suncorp, the AOFM expects to bid for all of the APOLLO Series 2010-1 Trust Class A2 Notes at an indicative range of BBSW + 1.10% to 1.30%. The AOFM will not invest in the APOLLO Series 2010-1 Trust Class A1 Notes which it expects will be well subscribed by other investors.
Procedures for the lodgement of proposals are outlined in Operational Notice 25/2009 and these have not changed. A further $7.3 billion is available to be invested under the program, of which $3.14 billion has been allocated to future issues under serial arrangements. Arrangers (on behalf of issuers) are welcome to submit proposals with similar structures to the proposed APOLLO transaction or with other innovations that will promote a more competitive RMBS market.