Come on you REDS

Bank of Queensland prices first Aussie MBS deal of 2003.

After a quiet opening to the Australian securitization market in 2003, Bank of Queensland (BOQ) has issued the first mortgage-backed deal of the year with a A$400 million issue ($236.4 million). Macquarie Bank acted as lead manager on the deal - BOQ's tenth MBS issued out of the REDS programme - with ABN AMRO as co-lead.

Although MBS deals account for around 90% of all securitization issuance in Australia, this deal was more keenly awaited than most. With spreads on deals issued late last year widening to as much as 43bp over BBSW due to oversupply, market participants wanted to see if there had been a positive shift in investor sentiment and tighter pricing.

On the evidence of BOQ's latest offering, called Series 2003-1 Reds Trust, the answer to both those questions is yes. The 0.7-year A$100.5 million and 3.3 year A$292 million tranches - rated triple-A by both Moody's and Standard & Poor's - priced respectively at 26bp and 38bp over BBSW. In addition, the subordinated double-A minus rated A$7.5 million piece, equivalent to 1.9% credit protection for the senior notes, offers a pick-up of 70bp.

According to Teresa Neal, associate director of debt markets at Macquarie, the tighter pricing was due in part to strong interest shown by overseas accounts. "The issue closed early, due to oversubscription in all tranches," she comments. "We believe the notes are fairly priced, particularly in comparison to levels prevailing at the end of 2002. The levels achieved were at the low end of our expected range. As anticipated, offshore interest was very strong resulting in the notes being distributed to a wide spread of investors."

The lead manager's allocation sold to 22 investors, with 45% of the notes placing with foreign investors. Of that total, 83% were European buyers with the remaining interest coming from Asian accounts.

Over the past year or so, the participation of foreign investors in the Aussie MBS market has become increasingly significant. There are widespread concerns that the domestic investor base can no longer absorb all the MBS paper issued; especially as selling paper into asset backed conduits will become increasingly difficult due of more restrictive accountancy rules.

Neal concurs with the view. "The assumption that offshore investors are making up for the gap left by conduits is correct," she concludes. "I believe this will be a growing trend for those Australian issuers which are able to comply with S128F of the Tax Act - i.e. their issues are free from withholding tax."