Suncorp mortgage bond trigger not concerning

As borrowers have paid down their mortgages the proceeds have flowed to investors, according to their seniority.

At present, the highest ranking Class A1 investors have been repaid in full while $120 million is outstanding to the remaining classes of investors.

The balance represents 12 per cent of the original pool size, and once this reaches 10 per cent, Suncorp can “clean up” or repay the remaining investors.

‘Extremely unlikely’

Of the remaining loans in the pool, more than 3 per cent are more than 60 days behind in their payments.

That has triggered a clause whereby payments to various classes of bondholders switch from pro-rata to sequential – so that repayments of capital to the most senior ranking investors are prioritised.

Realm Investment House’s Rob Camilleri said the “documentation has acted to delay the pay-down for junior noteholders” but did not mean there would be losses or write-downs for investors.

Mr Camilleri, an experienced mortgage bond investor, said no Australian mortgage bond has ever defaulted “and all residential mortgage-backed pools and notes have been repaid in full”.

“It does not remove the risk that this may happen. However, it is extremely unlikely.”

A Suncorp spokesman said that “in the case of the Apollo Series 2010-1, this is a very small number of customers going into arrears”.

“As for the broader Suncorp retail portfolio, the proportion of arrears that are greater than 60 days is low at around 1.3 per cent.”

Westpac asset-backed securities analyst Martin Jacques told clients on Tuesday that the trigger was “not unprecedented” and said it was “erroneous to claim that this transaction is the first local mortgage bond to encounter difficulty since the global financial crisis”, as a news report had done.

Additional layer of coverage

Mr Jacques said other mortgage-backed transactions had triggered similar provisions in recent years, due to several factors such as delinquency rates.

Investors expect that when the pool size reduces from $120 million to $100 million and the “clean-up call” conditions are met, Suncorp will repay the remaining capital owed to investors.

This “provides an additional layer of coverage for the noteholders in the event of mortgage default”.

“To date there have been zero reported losses on sale with no LMI [lenders’ mortgage insurance] claims,” Mr Jacques said.

This “provides an additional layer of coverage for the noteholders in the event of mortgage default.

“To date there have been zero reported losses on sale with no LMI claims.”

At present, rating agencies are reporting low levels of home loan arrears. Fitch Ratings said in late February that 30-day plus arrears were unchanged in the fourth quarter at 1.05 per per cent. This was helped by falling unemployment and under-employment rates.

However, the agency said arrears on vehicle loans had jumped to a record highs of 2.05 per cent for loan repayments more than 30 days overdue and 1.03 per cent of loans overdue by more than 60 days.

Source link Finance News Australia

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