Author: | Published: 10 Oct 2001
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According to figures supplied by Standard & Poor's, the Australian securitization market continues to grow strongly. In the six months to June 30 2001 A$16.8 billion of securities were issued, compared with A$12.5 billion for the same period last year. This represents an increase of 34% in volume and equals 68% of the total securities issued for all of 2000. These figures suggest that the Australian securitization market is undergoing strong volume growth and, if translated into full-year figures, will mean another record year.

The Australian securitization market continues to be dominated by residential mortgage-backed securities (RMBS). In the first half of 2001, A$15.4 billion of RMBS were issued. Significantly, 71% of all RMBS were issued into the US and/or Euro markets where there is strong investor appetite for Australian retail mortgages. In this respect, the final two of Australia's top four major banks established global securitization programmes in the first half of 2001 and all of Australia's major home-lenders now have active offshore securitization programmes.


Commercial mortgage-backed securities (CMBS) attracted the most interest over the last year. To date, 17 Australian deals have been rated in this assset class.

The main CMBS transactions over the last 12 months were:

  • Macquarie Office Trust's issue of $250 million of Class A 2000 Notes in July 2000 backed by cashflows from a portfolio of approximately 16 commercial office towers located throughout Australia;
  • David Jones's A$133 million issue of commercial mortgage-backed securities secured over a number of its department stores;
  • the Commonwealth Property Investment Trust's issue of A$150 million CPIT 2006 Aurora bonds, backed by cashflows from the Aurora Place office tower in Sydney;
  • Mirvac's issue of A$500 million of notes backed by 25 commercial properties held by the Mirvac Property Trusts; and
  • Quay 62's issue of A$110 million of notes backed by properties owned by the AMP Industrial Warehouse Trust.

The most innovative of these were the issues by the Macquarie Office Trust and David Jones. The Macquarie Office Trust was the first CMBS issue by an Australian listed property trust and paved the way for Australia's very large retail property funds management sector to raise debt competitively by issuing highly rated and structured CMBS. It, for example, strongly influenced the Quay 62 transaction. The David Jones transaction included a component involving a retail CMBS issue, the first time in Australia that securitized instruments have been offered to the investing public. This feature was recently repeated by the offer of PRISE notes by Acacia Securities, the performance of which are linked through a credit swap to the performance of a diversified pool of commercial property loans held by Westpac.


The Australian Federal Government has postponed the implementation of its new entity tax regime which would have affected the taxation treatment of securitization trusts in Australia. The focus of attention since then at the Federal level has primarily been in relation to the government's draft legislation on thin capitalization and the distinction between debt and equity securities for taxation purposes. Significantly, the Federal Government also recently announced a further reform to the Australian interest withholding tax regime in relation to debt securities (including securitized instruments) issued offshore. Unlike in the past, these securities may now be acquired by associates of Australian residents without affecting their exemption from interest withholding tax provided that the other tests for this status are satisfied.

At a state level, the most significant development has been the reforms in Queensland, Tasmania and Victoria to their stamp duties legislation. Originally, when the reforms were proposed, a number of the changes would have adversely affected the stamp duty treatment of securitization transactions in these jurisdictions. Importantly, though, each jurisdiction has indicated that it will provide a concession for mortgage-backed securities. However, the position in relation to asset-backed securities remains uncertain at the time of writing.


This transaction was the first carbon credits trade in Australia and is the world's largest to date. Under the Kyoto Accord, the signatories promised to cut by 2012 greenhouse gas emissions by an average of 5.2% below the levels in 1990. The Kyoto Accord recognizes three methods of achieving reductions in emissions — "joint implementation", the "clean development mechanism"and "emissions trading". Joint implementation (recognized in Article 6) allows for the transfer of "emission reduction units" between certain signatories. The clean development mechanism (Article 12) highlights the need in developing countries to achieve sustainable development, but at the same time ensuring that these countries achieve emission reductions.

Article 17 provides the formal basis for the establishment of an international market in carbon credits by providing that certain signatory countries may participate in emission trading for the purpose of achieving their emission reduction targets.

To illustrate the general principle, entity A emits less greenhouse gases than its own allowance. It may then trade the difference with B, which emits in excess of its allowance. The difference, the emission reduction unit, or carbon credit, can be used by B to offset its excess emissions.

Importantly from an Australian perspective, recent resolutions in Bonn confirmed the principle that "carbon sinks" may be used to offset certain signatories' emissions. Australia, as part of the so-called Umbrella Group which includes Canada, Japan and Russia, has lobbied intensely to allow its forests to be included in the inventory and therefore available to offset its own emissions and potentially as attractive investments to foreign emitters looking to acquire carbon credits to offset their domestic emissions. The next conference of parties in Marrakech in October/November 2001, will continue discussions on this issue.

Article 3.3 of the Kyoto Accord allows signatory states to include increases in the level of carbon stored as wood in forests to determine net changes in emissions from 1990 levels. Forests will only qualify for inclusion if afforestation or reforestation has occurred as a result of human activities since 1990. As the corollary, harvesting and de-forestation must also be accounted for as an offset or an "emission debit".

Current Australian government policy dictates that the purchaser of the credit should bear the emission debit on harvest. This does not prevent the purchaser agreeing to allocate this risk contractually to other transaction counterparties who may be better positioned to absorb the debit.


Under the draft market rules, to be discussed in Marrakech, a participating signatory can transfer and acquire carbon credits, "carbon emission reductions" and "assigned amount units" - equivalent to one metric tonne of carbon dioxide (certified in accordance with agreed standards) if:

  • it is a party to the Kyoto Accord;
  • it is a party to an agreement which sets out the methodologies for compliance with the Kyoto Accord commitments;
  • it has submitted a report demonstrating how it will:
    (a) achieve its emission reduction targets; and
    (b) account for its emissions and its targets in accordance with the agreed methodologies; and
  • it has submitted its annual inventory of emissions and offsets against those emissions.

Signatories can establish domestic rules governing emissions trading but the state is still responsible for fulfilment of its obligations under the Kyoto Accord. Any domestic market established must comply with the Kyoto Accord methodologies. If a signatory is not complying with its Kyoto Accord commitments, domestic emissions trading must be suspended (COP7 Bonn, Sixth Session part two, "Decisions Concerning Mechanisms Pursuant to Article 6, 12 and 17 of the Kyoto Protocol", page 41, paragraph 5). This sovereign risk is another risk that needs to be managed within a structured transaction.


In the transaction, the Japanese oil refinery, Cosmo Oil, entered into a 10-year option facility with Australian Plantation Timber. Under the facility, Cosmo can require that a bankruptcy-remote special purpose vehicle transfer to it specified volumes of carbon sequestered in an Australian forestry sink at fixed prices. The facility also allows for additional volumes to be traded at prevailing market prices at each option exercise date.

The Cosmo transaction was unique as it mitigates not only usual project risks but also risks that are peculiar to carbon rights trading. The transaction allocates risks such as counterparty insolvency and default, changes in government policy and regulation and tax law changes in ways similar to other structured transactions. For example, Cosmo may exercise its rights in relation to the carbon credits held by the special purpose vehicle as a secured creditor, rather than join with the main body of unsecured creditors if a key counterparty becomes insolvent.

Risks peculiar to the carbon credit trades have also been addressed in the Cosmo transaction. For example, it is necessary to obtain independent and reliable verification of the volume of carbon sequestered in the relevant Australian forests. Under the arrangements, a qualified and independent forest verifier will conduct an annual carbon audit, advise Cosmo and the forestry group of the growth performance of the forest measured against a model developed for the transaction in consultation with the Australian Greenhouse Office and issue a certificate which Cosmo can rely upon as evidence of action taken to offset its emissions.

The documentation also addresses the consequences to the carbon credits generated and traded when the forest is destroyed, either in due course or as a result of a force majeure event such as a fire. Under the policy developed from the Kyoto Accord, the harvest or destruction of a forest creates a corresponding carbon debit. This is then allocated to the counterparty within the structure best able to assume that risk. In the Cosmo example, the Australian forestry group held a large pool of Kyoto Accord compliant post-1990 forestry assets and was therefore able to absorb the debit across its pool of assets.


Australia has developed over the last 10 years a mature and sophisticated securitization market, with all major asset classes represented. Innovation has been a repetitive feature of the Australian banking industry over this period and the latest example of this is the Cosmo transaction, which established a model for the international trading of carbon credits.

Clayton Utz
Levels 23-35
No. 1 O'Connell Street
Sydney, NSW 2000
Tel: +612 9353 4000
Fax: +612 9251 7832