Wednesday, 24 October 2007

S&P may chop ratings on Aust & NZ RMBS

A timely reminder that Australia is not immune from the tentacles of the global meltdown in RMBS. From Bloomberg:

S&P May Cut Australian, N.Z. Mortgage Bond Ratings

Standard & Poor's may cut the credit ratings of 207 Australian and New Zealand residential mortgage- backed securities as turmoil in the U.S. subprime market spreads to home-loan insurers.

It's the first time in five years S&P has put securities backed by Australian and New Zealand mortgages on negative "creditwatch," said Kate Thomson, an analyst at S&P in Melbourne, said today. Placing the bonds on Creditwatch negative, which means a rating cut is possible within 90 days, may drive yields on the debt higher.

S&P lowered ratings on about $50 billion of U.S. securities last week amid criticism from investors and lawmakers for downplaying the risk of subprime bonds. The ratings service said Oct. 19 it may lower the credit rating of PMI Group Inc. and its Australian unit after the second-largest U.S. mortgage insurer posted a $350 million third-quarter loss as defaults increased.

"Australian notes will definitely be affected in both the primary and secondary market and some new issues will price higher as a direct result," said Warren Mellor, structured credit analyst at National Australia Bank Ltd. in Melbourne.

Mortgage-backed bond sellers are already offering higher yields on securities to entice buyers back to a market that stalled in August after BNP Paribas SA, France's largest bank, followed Bear Stearns Cos. in freezing withdrawals from hedge funds, triggering a liquidity crunch in the global credit markets.

Australian lenders including Calibre Financial Ltd. and FirstMac Ltd. last week sold mortgage-backed bonds at yields more than double the rate of previous sales, according to data compiled by Bloomberg.

PMI Rating Watch

Sydney-based PMI Mortgage Insurance Ltd. has the third- highest investment grade rating of AA and is one of the two largest insurers of Australian home loans used to secure bonds. The 207 home loan-backed bonds that may be cut are also rated AA and some were created as recently as this month.

Almost all of the mortgage-backed bonds with ratings below the top AAA level monitored by National Australia Bank are at least partly backed by home loans insured by PMI Mortgage, Mellor said.

``We are seeing an entire product range being affected by PMI and the impact on our domestic market is a direct consequence of the company's business in the U.S.,'' Mellor said.


Ghoti said...

Is it me or is the section about PMI obscure? Is PMI the 2nd-largest U.S. mortgage insurer, or was it some other company the posted a $350million loss? How much business - maybe that should be what proportion of its business - does "Sydney-based" PMI have in the US? Is Mellor suggesting it's enough to bring PMI down? Is the status of PMI driving the status of the bonds, or vice versa, or neither? Aaaaaargh!!!

The Fundamental Analyst said...


From the article it would appear that the $350 million loss was incurred by the US based PMI Group Inc. which happens to be the 2nd largest insurer of mortgage in the US.

I can't answer how much business it does in Australia but I think it would be safe to assume given the US housing boom and the size of the US market that the majority of their business is conducted there.

I don;t think Mellor is suggesting it's enough to bring them down. I don't think there is enough information out there to gauge that yet.

It is the status of the company that S&P is considering downgrading which will obviously have a knock on effect to the rating of the bonds they have backed.

We should get more clarity on October 30th when PMI group Inc. report results.