Last week YieldReport reported on the Pepper Group arranging a nine-tranche non-conforming RMBS deal. The details are now available and the Group has pulled off the largest transaction of its kind in a decade at $700 million. There have been other RMBS transactions larger, such as CBA’s $1.6 billion of RMBS sold last month but none so large by a non-bank lender in the non-conforming loan space. Non-conforming loans are usually loans to self-employed borrowers, low-doc borrowers or borrowers with prior ‘credit impairment’ history. Also, they typically do not have mortgage insurance.
Pepper’s latest transaction had a $122 million, AAA rated tranche at 1m BBSW + 170bps with an average maturity of 2.2 years. A comparable deal of theirs completed in September 2015 was priced at BBSW + 130bps, although there were other parts of that deal done at higher yields (BBSW + 225bps).
Co-CEO Patrick Tuttle said, “The all-in increase in funding costs…is just shy of 40 basis points, which equates to an increase of circa 5-6 basis points in funding costs across our entire Australian mortgage book. This is consistent with previous guidance, remembering that we also previously increased customer interest rates across our entire book by 20 basis points on December 1, 2015.”
There was a discussion about whether the group’s ‘adjusted’ net profit was used as the guidance and whether the average yield on the two tranches was a better reflection of the real yield being offered.
Around $368 million of the deal was issued in US dollars and 76% of the units issued were purchased by overseas investors.