Westpac Opens Path To Finance

Sydney Morning Herald

Monday March 17, 2008

Danny John

LEADING banks are looking to follow an unusual fund-raising move by Westpac as the global liquidity crisis continues to drive the price of credit to stratospheric and unaffordable levels.

With the main Australian lenders scouring the world for any available source of debt finance, Westpac's decision to package $10 billion of prime residential mortgages - part of its wider home loan portfolio - into an internally backed trust has attracted widespread interest in the industry.

In a financing deal that is similar to an old-style issue of investments in the now-crippled residential mortgage-backed securities (RMBS) market, Westpac will be able to tap the Reserve Bank of Australia for cash by offering the notes for purchase in its daily money market operations.

Such financing deals were the mainstay of global RMBS markets before they shut down as a result of the credit crunch stemming from the US subprime loan crisis last year. The Australian RMBS market was the fourth-largest in the world, but hardly any new issues have been made on it this year.

As a result, the big banks have been looking at alternative ways to use their existing resources to bolster lending capacity as the access to tens of billions of dollars of relatively cheap leverage has disappeared on a whole range of different debt markets.

With borrowing costs now standing at about 100 basis points above official cash rates, the main lenders are now talking about rationing lending through both pricing and actual amounts lent to corporate and individual customers to ensure their lines of credit remain open.

The Westpac move, dreamed up by the group treasurer, Curt Zuber, will allow the bank to raise $9 billion of emergency credit if debt costs continue to blow out. A Westpac spokeswoman said it provided a source of contingency funding in the event of a further deterioration in credit markets.

The bank took advantage of changes made late last year by the Reserve Bank broadening the type of collateral it was prepared to accept through its money re-purchase market to help tackle the worldwide liquidity crunch.

By packaging its secure mortgages into one lot but still holding it in reserve on its balance sheet, Westpac can move quickly to raise cash rather than take weeks in pulling all the loans together only to see the financing window subsequently close.

In a recent note to clients, the JPMorgan banking analyst Brian Johnson said the move made sense and he expected other banks to follow suit.

"This does not indicate that securitisation markets are reopening, but rather that in the face of the ongoing global credit crunch the RBA repo function presents a potential source of cheap 'crisis liquidity' in an environment where liquidity is expensive," Mr Johnson said.

The increasingly novel approaches to tapping liquidity come as Stuart Davis, the chief executive of the Australian arm of the global banking group HSBC (formerly the Hong Kong and Shanghai Bank), warned over the weekend of the dangers of the financing crisis increasingly being being felt in the "real" economy.

Mr Davis told the Herald the country was "feeling the backwash" of the wider credit crunch, which at this stage showed no immediate signs of ending.

© 2008 Sydney Morning Herald

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