Powered by MOMENTUM MEDIA
subscribe to our newsletter
European lending rates risky for Aussie RMBS

European lending rates risky for Aussie RMBS

The continued decline of European inter-bank lending rates (Euribor rates) below zero poses risks to Australian residential mortgage-backed securities (RMBS), an analyst has warned.

Alena Chen, assistant president and analyst at Moody’s Investors Service, says that as Euribor rates move further into negative territory – “beyond the buffer provided by the note margins” – such deals will need to make net payments to swap counterparties.

“The payment outflows reduce excess cash flow and can result in insufficient proceeds to make required payments to other transaction counterparties and noteholders,” Ms Chen said.

Advertisement
Advertisement

Moody’s noted that in a typical Euro currency swap, the swap counterparty will make Euro interest payments to the deal based on the index rate and margin, at a specified exchange rate.

“In a negative interest rate environment, if the all-in interest rate (index plus margin) is negative, then net monies are owing to the swap counterparty and the deal has to exchange additional cash flows to make the payments to the swap counterparty,” Moody’s said.

“Deals will only need to make net payments if the sum of the Euribor rate and note margin is negative. The higher the note margin, the larger the buffer it provides against negative Euribor rates.”

[Related: Investor curbs positive for RMBS, says Moody’s]

European lending rates risky for Aussie RMBS
mortgagebusiness

 

Latest News

APRA’s proposal to loosen serviceability measures could reignite the credit boom, Moody’s has said, amid growing expectations that the m...

The median time on market for a residential dwelling has almost doubled, reflecting subdued demand for housing amid falling property prices,...

NAB and Westpac are among the 56 banks to endorse the United Nations’ Principles for Responsible Banking that will be launched in Septembe...

FROM THE WEB
podcast

LATEST PODCAST: How the mortgage sector will be impacted by the federal election

Do you think the banking royal commission recommendations could negatively impact competition in the mortgage market?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.