March 5, 2019 / 7:07 AM / 4 months ago

Australia mortgage defaults trigger repayment limits for Suncorp bond

    By Paulina Duran
    SYDNEY, March 5 (Reuters) - High defaults in residential
mortgages backing securitised bonds sold by Australia's Suncorp
Group          have triggered a clause that limits principal
repayments for some investors, the manager of the bonds has told
    The unusual trigger is the earliest signal of the impact the
country's sharpest property downturn in a generation is having
on the country's A$1.8 trillion ($1.27 trillion) mortgage pool.
Ratings agency S&P Global has warned that weaker economic
conditions will put pressure on arrears and repayment rates.
    Notifying Suncorp bondholders of the trigger, the manager
SME Management Pty said it would prioritise principal repayments
to the holders of the two senior tranches of the bond - Class A2
and Class AB - ahead of Class B noteholders.
    According to Suncorp's bond documents, loan arrears must be
less than 3 percent in each of the prior 12 months in order to
allow principal repayments to all investors on a pro-rata basis.
    But the clause was triggered since more than 3 percent of
the loans backing Suncorp's 2010 securitised bond were over 60
days overdue, the manager said. This compares with a rate of 1.3
percent for Suncorp's own mortgage book.
    While the clause is standard for securitised bonds, it is
unusual for it to be triggered as the 3 percent cut-off is much
higher than that of the overall industry.
    For the Suncorp bond issue in question, A$120 million is
outstanding to the three classes of investors - A2, AB and the
Class B noteholders.
    Under the clause, Class B noteholders will only receive
principal distributions for the month of March after all
payments have been made on higher-rated debt.
    Once the outstanding amount to be paid drops below about
A$100 million, Suncorp has a standard option to call in the
bonds and close the trust it set up to issue them in 2010. 
    "All holders are expected to receive the full principal
amount once the trust is called," a Suncorp spokesman said.
    S&P Global, however, has said that borrowers' debt
serviceability could be hurt due to softening macroeconomic
conditions. "Declining property prices pose more of a risk for
junior tranches of residential mortgage backed securities
transactions," it  added.
    Australia's GDP data, to be released on Wednesday, is likely
to show domestic momentum almost stalled last
 ($1 = 1.4128 Australian dollars)

 (Reporting by Paulina Duran; Editing by Himani Sarkar)
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