Securitisation as an Alternative Funding Tool May Roger Desmarchelier Chief Manager Group Securitisation St George Bank

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1 Securitisation as an Alternative Funding Tool May 2007 Roger Desmarchelier Chief Manager Group Securitisation St George Bank

2 Agenda Why Securitise Growth of global securitisation What assets have been securitised. Securitisation structuring Global distribution of Australian securitisation Australian Securitisation Forum

3 Why Securitise? Balance sheet management Can 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 sources Opens up access to new investor bases and funding sources that can provide resilience in times of liquidity crises.

4 Why Securitise?? (cont.) Enhance liquidity Transforming illiquid asset pools into marketable securities that when transferred into cash, can enhance originator liquidity. Reduce cost of funds For lower rated originators, securitisation can often achieve a lower cost of funds than raising debt in their own name. Enhance strategic profile An 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.

5 Why Securitise?? (cont. 2) Manage and match asset/liability profile Securitisation 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 risk By 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 practice The process of securitisation opens up originators to external review by bankers, investors, lawyers, accountants, trustees and rating agencies. This can often provide originators with insights into market best practices.

6 Growth of Securitisation 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 ABS 45% Kangaroo 19% Corp/Fin 36%

7 ABS Growth by Sector USA USD (bn) Cards Other Autos Student loan M anufd Hs Equipm ent Hom e eq Growt h 60% 50% 40% 30% 20% Growth Rate % % (Barclays Capital 2007)

8 ABS Growth by Sector Europe 600 Whole Business 120% 500 Consumer CMBS 100% USD (bn) Other RMBS Growth Rate 80% 60% 40% Growth Rate % YTD (Barclays Capital 2007) 0%

9 Australian Securitisation growth 70,000 60,000 (A$ millions) 50,000 40,000 30,000 20,000 10, ytd AUD 4,686 6,609 12,410 15,927 18,736 22,546 31,249 37,884 9,138 Euro 6,162 3,052 2,129 1,034 3,418 13,749 8,657 11,414 4,120 USD 2,890 6,372 13,647 13,959 21,552 18,540 9,033 13,376 6,558 (Standard & Poors 2007)

10 What Assets Have Been Securitised? Margin loans Residential housing Loans Car loans & leases Small-ticket commercial loans Predictable cash flows Commercial property Credit card receivables Trade receivables Equipment leases Net interest margin flows

11 Australian Issuance: Summary by Asset Class 80,000 70,000 (A$ millions) 60,000 50,000 40,000 30,000 20,000 10, ytd ABS 3,121 2,103 1,381 2,585 1,963 3,280 2,018 3,752 2,126 CMBS ,530 3,108 2,877 1,833 2,263 5,161 0 RMBS 13,738 16,033 28,186 31,841 44,694 57,995 50,587 62,654 20,565 Standard & Poors.2007

12 Key Characteristics of Securitisation Structures 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.

13 Key fundamentals of securitisation. Before Obligors Assignment of right to receive payments After Originator SPV Principal and interest Investors

14 Credit Enhancements Purpose: To insulate investors from losses on underlying cash flows (1) External credit enhancement Mortgage insurance or credit wrap at asset-level and/or deal-level (2) Internal credit enhancement Subordinated tranches Overcollateralisation Excess Servicing Margin

15 Cash 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.

16 Credit Tranching Cash flow and loss allocation Cash flow waterfall Senior note Mezz note 3 2 Junior note 1 Losses

17 Securitisation General Structure Dealers Investors Manager MBS / ABS debt securities Subscription proceeds Credit enhancement Trustee SPV Liquidity enhancement Security trustee Servicer Sale of assets Purchase consideration Swaps (Other facilities) Rating agencies Originator

18 Choice of Issuance Markets Domestic issuance Easiest, cheapest and fastest option. Investor proximity and familiarity with market, sector, and originator. Very effective for mid size transactions. Cross-border issuance Increases 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.

19 Choice of Issuance Markets (cont.) Domestic issue An issue of debt securities in A$ issued into the Australian capital market. Investors may be domiciled outside of Australia. Euro issue An issue of debt securities to investors in the European markets. US 144A issue An 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 AB An 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

20 Australian RMBS Distribution in 2006 Australian ABS to Asia 15% of AUD$ denominated deals 10% of USD denominated deals 3% 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 the USA 45% of USD denominated deals 2% of Euro denominated deals

21 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.

22 Shaping the Securitisation Market To shape the future of the Australian Securitisation Market for the ongoing benefit of our members.

23 ASF StrategicS Goals Advocacy To anticipate and influence regulatory changes with a view to establishing and advancing the interests of the securitisation industry. Investor engagement To broaden the investor base and to increase the allocation to Australian securitised products in portfolios. Education To achieve a high level of understanding and competence for the participants in the Australian securitisation industry.

24 Securitisation. Where from Here? Covered Bonds? New Issuers New asset classes APS 120 impacts Non LMI/senior/sub RMBS structures Acct./ Regulatory Changes Basle 11 impacts CLO/CDO synthetic structures

25 Securitisation Information

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