They must have the seven year itch. Wall Street financiers are back enticing Aussie mums and dads with the exciting opportunity to invest in pools of US mortgages.
“Neuberger Berman, the global asset manager that oversees $330 billion, is pleased to announce the proposed ASX-listing of the NB Monthly Income Trust (NB MIT). The NB Monthly Income Trust will provide investors with 6per cent per annum income from a diversified portfolio of US home loans,” says the flier.
There is a fine irony in this as Neuberger Berman used to be owned by fated Wall Street investment bank Lehman Brothers but was spun off during the global financial crisis in 2009. In fairness, this was the ‘good bit’ of Lehman but you still have to applaud their audacity.
It was Lehman and its Wall Street peers who almost blew up the world financial system peddling leveraged pools of US mortgages and now their former associates are back peddling pools of leveraged US mortgages again.
Is it not too risky for Australian retail investors to part with their after tax dollars buying pools of debt which would then be leveraged by a Delaware trust to buy more debt? Neuberger was keen to disavow us of this notion of excessive risk, and opacity.
As the Public Disclosure Statement for the float points out (that’s the fat, uninteresting bit in front of the Application Form), US mortgages are not as risky as they used to be. Under 2014 reforms they now have to be secured against an actual property.
So yes, lending standards are more stringent. In 2014, Ben Bernanke said he was even having a hard time refinancing his own home loan.
The former chairman of the US Federal Reserve told a conference, “I recently tried to refinance my mortgage and I was unsuccessful in doing so.”
And as Neuberger reps pointed out to Fairfax Media, they are floating assets which are secured by property. In contrast, the local Big Four bank hybrids which trade on the ASX could arbitrarily cut their distributions or convert into equity at any time. Indeed some were already trading at a suspicious discount to their stated asset backing.
But what though is on sale here? We don’t know for certain as the exact assets are yet to be purchased. The money must be raised first.
Once raised, let’s say they raise the maximum $250 million, that $250 million can be geared four times (Net Asset Value) to $1 billion. As fees are a percentage of net assets, the temptation to borrow towards the ceiling will be hard to resist.
Investors will own an ASX-listed trust (managed investment scheme) which has an investment in a Delaware partnership which they call the Underlying Fund, the US Residential Property Income Fund I LP.
That fund will buy pools of US mortgages and US Mortgage Backed Securities (RMBS) and derivatives – both exchange-traded and OTC (over-the-counter like CDOs, well not really CDOs, or maybe a bit but definitely not actual CDOs like in the bad old days).
“The Investment Manager (Neuberger) may invest in such other U.S. real estate-related assets, and engage in such other investment activities, associated with the U.S. home loan market as it deems appropriate provided such investments and/or activities are consistent with the Underlying Fund’s investment objective and its Investment Strategy,” says the PDS.
“The Investment Manager does not actively seek to invest in Home Loans categorised as ‘subprime’.” (Thank goodness for that).
A yield of 6 per cent is mighty nice in this environment. Term deposits are half that. And it’s a very strong selling point for Neuberger, whose people were out and about last week doing the rounds of the stockbroking shops.
Admittedly you can do a lot better than 6 per cent. If one were to be egregiously hairy-chested, one might purchase some debt in US coal company Peabody with a yield-to-maturity of more than 300 per cent (it’s a wonder the shares are still trading with bond prices like that).
It’s hard to argue with a return of 300 per cent. Even this peon of the Fourth Estate, ramshackle and barely solvent, would somehow scrounge up the readies to invest at 300 per cent. But of course, the sheer radiance of such a yield is telling you something – or screaming it at you – that is, the bond market reckons there is Buckley’s chance that Peabody will survive long enough to pay you back.
Neuberger’s offer might act as an acid test for the market. If the former Lehman Brothers’ business gets this away, there may be a float of this stuff and structured finance will be, once again, on for young and old … and solvent and broke.