Pepper Group prices second RMBS issue of 2018

Pepper Group’s second prime RMBS issue of 2018 has been priced at $600 million, with the majority of the funding, or around $480 million, to be raised via two tranches of A1 securities, one of which is USD-denominated.

The lender’s treasurer, Paul Byrne, said that the Pepper I-Prime 2018-2 Trust is its first to offer investors the opportunity to invest in US dollar notes.

“The transaction was well supported by our deep and diversified onshore and offshore investor base who invested in both Australian and US dollar notes,” Mr Byrne added.

Investment loans represent 57.8 per cent of the portfolio, while interest-only loans account for 47.2 per cent, both of which are above Australia’s mortgage market averages of 33.6 per cent and 28.8 per cent (as at 30 June 2018).

Further, 42 per cent of the portfolio comprises prime owner-occupied loans.

Pepper’s A1-u1 notes, valued at US$253 million (around AU$358 million), received the highest short-term rating of P-1 by Moody’s Investors Service, while A1-a notes (AU$130 million) were assigned the highest long-term provisional rating of AAA.

“The transaction benefits from multiple mechanisms which divert excess spread to provide loss coverage or liquidity, such as the amortisation reserve, yield enhancement reserve and over-collateralisation amount,” the ratings agency said.

The remaining classes (A2, B, C, D, E, F and G) were not rated by Moody’s.

According to Mr Byrne, the second RMBS transaction of 2018 was an improvement on the previous one, which was priced at $1 billion, after receiving strong oversubscription exceeding $2 billion.

“The execution of this transaction… demonstrates not only the improving tone in market conditions, but additionally Pepper’s commitment to providing attractive investment opportunities to our investor base while also delivering against our overall funding strategy,” the treasurer said.

In terms of risk, Moody’s noted that the portfolio has a “relatively high” weighted average scheduled loan-to-value (LTV) ratio of 75.3 per cent, with 39.3 per cent of the loans with a scheduled LTV ratio higher than 80 per cent.

Moody’s additionally noted that the portfolio has a “low” weighted average seasoning of 2.7 months, with 95.1 per cent of loans originated in the last six months.

Further, 11.1 per cent of the $600 million portfolio comprises loans extended to borrowers on an alternative documentation basis.

Excluding its latest RMBS, Pepper has issued more than $11.6 billion of RMBS across 26 non-conforming and prime RMBS issues.

[Related: Arrears fall, rate rises unlikely to affect credit quality: Fitch]