SecuritisationSecuritisation as an as an Alternative Funding ToolAlternative Funding Tool

May 2007May 2007

Roger DesmarchelierChief Manager Group Securitisation

St George Bank

AgendaAgenda

Why Securitise

Growth of global securitisation

What assets have been securitised.

Securitisation structuring

Global distribution of Australian securitisation

Australian Securitisation Forum

Why Why SecuritiseSecuritise? ?

Balance sheet managementCan 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 sourcesOpens up access to new investor bases and funding sources that can provide resilience in times of liquidity crises.

Why Why SecuritiseSecuritise? (cont.)? (cont.)

Enhance liquidityTransforming illiquid asset pools into marketable securities that when transferred into cash, can enhance originator liquidity.

Reduce cost of fundsFor lower rated originators, securitisation can often achieve a lower cost of funds than raising debt in their own name.

Enhance strategic profileAn 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.

Why Why SecuritiseSecuritise? (cont. 2)? (cont. 2)

Manage and match asset/liability profileSecuritisation 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 riskBy 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 practiceThe process of securitisation opens up originators to external review by bankers, investors, lawyers, accountants, trustees andrating agencies. This can often provide originators with insights into market best practices.

Growth of Growth of SecuritisationSecuritisation

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

Corp/Fin36%

ABS45%

Kangaroo19%

ABS Growth by SectorABS Growth by Sector

USA

0

200

400

600

800

1000

1200

1400

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

USD

(bn)

0%

10%

20%

30%

40%

50%

60%

Grow

th R

ate

CardsOt herA ut osSt udent loanM anuf d HsEquipm entHom e eqGrowt h

(Barclays Capital 2007)

ABS Growth by SectorABS Growth by Sector

Europe

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007YTD

USD

(bn)

0%

20%

40%

60%

80%

100%

120%

Grow

th R

ate

Whole Business

Consumer

CMBS

Other

RMBS

Growth Rate

(Barclays Capital 2007)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

(A$

mill

ions

)

AUD 4,686 6,609 12,410 15,927 18,736 22,546 31,249 37,884 9,138Euro 6,162 3,052 2,129 1,034 3,418 13,749 8,657 11,414 4,120USD 2,890 6,372 13,647 13,959 21,552 18,540 9,033 13,376 6,558

1999 2000 2001 2002 2003 2004 2005 2006 2007 ytd

Australian Securitisation growth

(Standard & Poors 2007)

What Assets Have Been Securitised?What Assets Have Been Securitised?

Commercial propertyPredictable

cash flows

Residential housing Loans

Small-ticket commercial

loans

Car loans & leases

Equipment leases

Net interest margin flows

Margin loans

Trade receivables

Credit card receivables

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000(A

$ m

illio

ns)

ABS 3,121 2,103 1,381 2,585 1,963 3,280 2,018 3,752 2,126CMBS 343 505 1,530 3,108 2,877 1,833 2,263 5,161 0RMBS 13,738 16,033 28,186 31,841 44,694 57,995 50,587 62,654 20,565

1999 2000 2001 2002 2003 2004 2005 2006 2007 ytd

Australian Issuance: Summary by Asset ClassAustralian Issuance: Summary by Asset Class

Standard & Poors.2007

Key Characteristics of Key Characteristics of SecuritisationSecuritisation StructuresStructures

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.

Key fundamentals of Key fundamentals of securitisationsecuritisation..

Originator SPV

Obligors

Investors

Assignment of right to receive payments

Before After

Principal and interest

Credit EnhancementsCredit Enhancements

Purpose: To insulate investors from losses on underlying cash flows

(1) External credit enhancementMortgage insurance or credit wrap at asset-level and/or deal-level

(2) Internal credit enhancementSubordinated tranches

Overcollateralisation

Excess Servicing Margin

Cash Flow EnhancementsCash 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.

Credit Credit TranchingTranching

Cash flow and loss allocation

Senior note

Mezz note

Junior note

Cash flow waterfall

Losses

1

2

3

1

3

2

Securitisation Securitisation –– General StructureGeneral Structure

SPV

Originator

Investors

Sale of assets

Purchase consideration

MBS / ABS debt securities

Subscription proceeds

Credit enhancement

Liquidity enhancement

Dealers

Manager

Trustee

Security trustee

Servicer

Rating agencies

Swaps

(Other facilities)

Choice of Issuance MarketsChoice of Issuance Markets

Domestic issuanceEasiest, cheapest and fastest option.

Investor proximity and familiarity with market, sector, and originator.

Very effective for mid size transactions.

Cross-border issuanceIncreases 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.

Choice of Issuance Markets (cont.)Choice of Issuance Markets (cont.)

Domestic issueAn issue of debt securities in A$ issued into the Australian capital market. Investors may be domiciled outside of Australia.

Euro issueAn issue of debt securities to investors in the European markets.

US – 144A issueAn 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 ABAn 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

Australian RMBS Distribution in 2006Australian RMBS Distribution in 2006

Australian ABS to the USA

45% of USD denominated deals

2% 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 Asia

15% of AUD$ denominated deals

10% of USD denominated deals

3% of Euro denominated deals

Summary of Benefits of Securitisation 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.

Shaping the Shaping the SecuritisationSecuritisation MarketMarket

“To shape the future of the Australian Securitisation Market for the ongoing benefit of our members”.

ASF SASF Strategictrategic GoalsGoals

AdvocacyTo anticipate and influence regulatory changes with a view to establishing and advancing the interests of the securitisation industry.

Investor engagementTo broaden the investor base and to increase the allocation to Australian securitised products in portfolios.

EducationTo achieve a high level of understanding and competence for the participants in the Australian securitisation industry.

Securitisation. Where from Here?Securitisation. Where from Here?

New asset classes

CLO/CDO synthetic structures

Covered Bonds?

Non LMI/senior/sub

RMBS structures

Acct./ Regulatory Changes

New Issuers

Basle 11 impacts

APS 120 impacts

Securitisation Securitisation InformationInformation

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www.securitisation.com.au

www.americansecuritization.com

www.europeansecuritisation.com