Brian Salter, in addition to his day job as a partner with law firm Clayton Utz, is also chairman of the Australian Securitization Forum (ASF), which was the first of its kind when established over a decade ago. Here he talks to FinanceAsia about some of the key deals and issues affecting the Aussie securitization market.
What have been some of the key securitization deals in the past year?
I think there are three that really stand out. The SMART transaction, a synthetic securitization for Macquarie, was notable for a number of reasons. Firstly, it is one of only three public synthetic deals and the first to securitize auto leases in the world. It was also the first in Australia that led to a bank getting capital relief.
I think that synthetic securitization has a lot of potential in Australia, which has not yet been fully explored. Under our tax regime, there are taxation consequences with the traditional assignment of certain asset classes, particularly lease receivables. Synthetics offer the solution to that.
One other notable transaction was the first issue of a shelf registration for a non-US issuer in the United States - Commonwealth Bank of Australia, and Westpac followed on very quickly after that. The third deal was a global issue by a non-bank issuer, Puma (the securitization program set up by Macquarie Securitisation Ltd). I think it's significant because it shows that non-banks can tap offshore markets at a time when there might be question marks over the capacity of the domestic market to fully absorb securitization transactions.
What role does the ASF play in the Australian securitization market?
The ASF was established 12 years ago and was the first body in the world to represent the securitization industry, and the model has been exported overseas. The ASF has a number of primary goals, first of which is to educate regulators and other participants in the securities markets on the benefits of securitization, and through that look at ways that any impediments to securitization can be resolved. We also try to promote Australian mortgage backed securities, for example by being sponsored at an annual conference in Arizona to highlight the quality of the product.
We have over 80 paid up corporate members of the ASF, which has given us the funds to work on our website, sponsor our conferences and employ a part-time secretariat. The ASF has several different committees on tax, regulatory, accounting, communications and foreign issues and has been extremely successful.
There is strong sentiment towards the Australian product from overseas, primarily in the US but also now in Asia. Does the ASF actively promote MBS paper in this market?
In Asia, investment banks have done most of the promoting of Aussie MBS as part of their effort to diversify the investor base. The ASF has not formerly targeted Asia, but a lot of Asian investors have been invited to attend our conference in November and a lot of presentations will be made to educate them as to the strengths of the product.
In the wake of Enron, a lot of concern has been expressed about the application of special purpose vehicles, particularly among regulators here. Have you spent much time talking to them this year explaining how and why securitization structures work?
I think the most important thing to realize with Enron is that the company used SPVs for a very different purpose than securitization. There's public awareness of what a securitization SPV is used for, while with Enron the SPVs were set up to hide losses. It has certainly been an issue in the US, but I actually think it has been less so here because of the openness of the markets. It is also a smaller financial community so there is probably more dialogue between market participants and the regulators.
Australia is at a much more advanced state than other Asian countries in terms of its legal and regulatory framework. Are there any lessons that the Asian markets could learn from the Australian experience?
One important reason why the Australian market has progressed so well is that the government has realized there are tangible benefits from securitization. For example, we have a very competitive home loans market that has largely been fuelled by the non-bank entrants to the market such as Wizard, Aussie Home Loans and Rams, and a lot of these players are funded through securitization.
The government has been sympathetic and has listened to the market's views when it comes to impediments that might have affected the progress of securitization. Along those lines, the real breakthrough came when the Reserve Bank of Australia issued detailed requirements that banks had to satisfy to get off-balance sheet treatment for capital adequacy purposes. This has now been extended to cover credit unions and building societies.
I think this demonstrates the commitment to securitization from the Reserve Bank. Banks hold most of the assets in this country, so you needed them to be able to participate and this was a major breakthrough.
Another important factor is the level of disclosure in our markets, because it gives investors a high degree of confidence in the securities they are purchasing. It is important for any country that wants to encourage securitization that good disclosure laws are in place.
We have got the point now where the capital markets deliver tremendous benefits to Australian corporates. It is an alternative source of funding to the bank market and you see price tension between the two, which is the way it ought to be.
Do you think Australia has any role to play in the development of other Asian markets?
It certainly could have a role from an education standpoint because there is a huge amount of expertise in the Australian financial markets. The government has been active in promoting the country as a global financial centre and has been quite successful in attracting investment here. In addition to that of course, a lot of professionals are based in Asia and have been active in trying to develop the market.
