Moody's Australia RMBS Review Could Shake Up Some Issuers

Moody's Investors Service began a re-assessment of its methodology for rating Australian residential mortgage-backed securities Tuesday, a move that could shake up some parts of the improving market for securitized debt in the country.

The most likely outcome of the Moody's change would be for the agency to follow Standard & Poor's by asking issuers to have a higher proportion of subordinated debt on deals to meet higher insurance requirements and greater protect those investing in top tranches. To add protection, issuers increase the size of the higher-yielding, lower-rated tranches, making RMBS issuance more costly for the issuer.

The S&P change added about 10-15 basis points to the cost of issuing RMBS -- hurting smaller issuers like Bendigo & Adelaide Bank Ltd. (BEN.AU), Resimac and FirstMac with shallower pockets.

Investors and analysts have been split on the change, acknowledging the benefit of more protection, but noting the move could add volatility to a market still trying to recover.

"This continues the ratings volatility that will be a permanent feature of structured finance," said David Goodman, a capital markets analyst with Westpac. "They're changing the goal posts a little, but I don't think it will have a big effect."

Even though Australian RMBS performed well during the global financial crisis, with no rated tranche of an Australian RMBS defaulting, ratings agencies have felt a reevaluation is necessary in the wake of a collapse in securitization markets in other regions around the globe.

Late last year, Standard & Poor's reevaluated its methodology for rating RMBS in Australia, following a similar move by the ratings agency in the U.S. and a global review by Moody's itself in late 2009.

Any impact from the change could be damaging to Australia's government, which has been trying to improve mortgage competition by supporting smaller lenders, committing A$20 billion for RMBS buying. That program was put in place to help securitization markets recover as regional lenders use these markets as their primary source of funding and as they have struggled, the country's four largest banks have seized control of more than 90% of the home mortgage market.

While the program has helped the RMBS market improve generally, with Australia on pace to price more than A$20 billion in RMBS this year, mortgage competition is yet to show any meaningful change, according to analysts.

-By Geoffrey Rogow, Dow Jones Newswires; [phone]; [e-mail]