31 August 2009
Purchase of Residential Mortgage-Backed Securities –Request for Proposals – Third Selection Round
This notice details arrangements for the next round of investments in residential mortgage-backed securities (RMBS) by the AOFM and invites the submission of proposals from arrangers of RMBS issues.
On 26 September 2008 the Treasurer announced that the AOFM would purchase RMBS to support competition in Australia's mortgage markets. Up to $8 billion is available for investment, including $4 billion to be allocated to issuer/originators that are not authorised deposit-taking institutions.
To date, the AOFM has invested a total of $7.382 billion across 17 mandates. Of the amount invested to date, $3.929 billion has been in securities of issuers that are authorised deposit-taking institutions and $3.453 billion has been in securities of issuers that are not authorised deposit-taking institutions.
The Third Selection Round - Non Authorised Deposit-Taking Institutions
This is the final selection round for the $8 billion provided in the Treasurer's directions of October 2008. As almost all of the remaining unallocated investment authority is restricted to securities of issuers/originators that are not authorised deposit-taking institutions, this selection round is limited to issuers that are not authorised deposit-taking institutions. The AOFM's participation in this round will continue to be in the role of a 'cornerstone investor, along with other investors.
One or more mandates may be issued, and they may again be allocated over time to avoid congestion.
- Mandates will be awarded to arrangers for specific transactions on behalf of issuers that are not authorised deposit-taking institutions. 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.
- 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 third selection round. The AOFM expects to have invested $8 billion in RMBS by the completion of this round.
Request for Proposals (RFP) - Purchase of RMBS by AOFM
This document outlines arrangements for the lodgement of proposals for the third selection round for the allocation of one or more 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 by the end of October 2009.
- 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 $100 million.
Eligibility to Lodge Proposal
Proposals may be lodged only by arrangers/lead managers that are members of the AOFM Investment Facility dealing panel (current panel members are listed in the Appendix) on behalf of issuers/originators 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 issuers/originators that are not authorised deposit-taking institutions.
The closing date for lodging proposals is 18 September 2009 (see below). The AOFM will assess the proposals and may discuss them with arrangers. Proposals should indicate the preferred timing for pricing and placement. The AOFM will seek to price the transactions under this RFP by the end of October 2009.
Proposals will be evaluated in terms of the contribution they will make to maintaining competition in housing lending and 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. Arrangers should provide an indicative timetable.
- The capabilities and quality of the asset servicer.
- The overall quality of the mortgage pool and securities on offer.
All proposals must be consistent with the requirements detailed below.
- The securities offered 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:
- 100 per cent prime Australian mortgages.
- Australian dollar denominated loans that are mortgage insurable.
- Closed pool, no substitution or prefunding permitted.
- Low documentation loans may not exceed 10 per cent of the initial principal value of the mortgage pool.
- Maximum loan size of $750,000.
- Maximum remaining loan term to maturity of 30 years.
- Maximum loan to value ratio of 95 per cent.
- Interest only loans may not exceed 50 per cent of the initial principal value of the loan pool.
- Maximum interest only period of 10 years.
- Days in arrears for an individual loan payment may not exceed 30 days.
- Mortgage insurability is best demonstrated through full insurance of the mortgage pool, but the AOFM will accept pools that are not fully insured where it is satisfied that alternative arrangements will provide an equivalent level of comfort about the quality of the mortgage pool. This may be provided by a combination of:
- Certification by a body independent of the arranger and issuer that the mortgages in the pool meet the published underwriting requirements of at least one major mortgage insurer;
- All the senior notes in which the AOFM would invest being assigned an AAA rating by at least one rating agency using an 'expected-loss' based methodology; and
- Equity contributions that enhance the credit of the senior notes.
- The issuer must commit to obtain an independent audit of the mortgage pool prior to the settlement of the transaction. Settlement will be conditional upon the successful completion of this audit, comprising both:
- Confirmation of the conformance of the pool with the above minimum requirements (a 'pool audit'); and
- Confirmation that a representative sample of mortgages in the pool can be traced back to loan documentation (a 'tie-back audit').
- The issue must provide for monthly reporting on the composition of the mortgage pool, 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.
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 selection criteria. It would be helpful for proposals to be presented in a manner that directly addresses the selection criteria.
The information provided should include:
- The undertakings the parties connected with the proposed issue are prepared to make in relation to use of the funds raised from the issue.
- Information indicating current mortgage origination activity.
- Information indicating previous securitisation activity of the issuer(s) including summary details of RMBS issues undertaken over the last five years.
- Expectations in relation to participation by other investors in the proposed issue.
- Expected timing for placement and pricing of the proposed issue and indicate any preference for timing or known issues particular to the proposed transaction that may delay the timetable.
- 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 indicative term sheet for the proposed issue which should include details of:
- Back up servicer;
- Interest payment details;
- Proposed levels of credit enhancement and credit support arrangements.
- An undertaking to report monthly on collateral and cash flows to ratings agencies, the trustee, wire services and arranging banks.
- An undertaking to obtain an independent audit of the mortgage pool and the name of the firm that will conduct the audit.
Lodging a Proposal
Proposals should be lodged by email to email@example.com, no later than 5.00pm Australian Eastern Standard Time, 18 September 2009.
The AOFM contact for enquires concerning this RFP is:
RMBS Portfolio Manager
Telephone: (61 2) 6263 1134
Facsimile: (61 2) 6263 1222
AOFM INVESTMENT FACILITY DEALING PANEL
(Panel Members as at 31 August 2009)
Australia and New Zealand Banking Group
Bank of Scotland
Bank of Tokyo-Mitsubishi UFJ
Commonwealth Bank of Australia
JP Morgan Chase
National Australia Bank
Royal Bank of Canada
Royal Bank of Scotland
St. George Bank
Sumitomo Mitsui Banking Corporation
Westpac Banking Corporation