Synthetic Master Receivable Trust Series 2002-1

In March 2002, Macquarie Bank arranged and lead managed SMART Series 2002-1, a unique synthetic securitisation of $1billion of auto and equipment leases.  This transaction was the first time that auto and equipment leases have been securitised synthetically anywhere in the world.

Through the SMART structure, Macquarie Leasing, a wholly owned subsidiary of Macquarie, transferred credit risk on a portfolio of $A1 billion of its lease contracts.

Macquarie Leasing purchased credit protection from SMART on the $A1billion portfolio.  In order to collateralise its obligations to Macquarie Leasing, Permanent Custodians Pty Limited as trustee of SMART Series 2002-1 issued $A130 million of credit linked notes to institutional investors in the domestic and offshore capital markets and entered into a credit default swap with an international bank with a notional amount of $A850 million.

The SMART structure enabled Macquarie to free up regulatory capital and to improve its return on Tier 1 equity.  The structure enabled all existing funding and hedging arrangements to remain undisturbed and preserved all of Macquarie Leasing’s administration and contractual arrangements with its customers and intermediaries.

Synthetic securitisation can be an attractive option for financial institutions and corporates to transfer credit risk where raising funding is not required.  It is often cheaper than a traditional funded securitisation as value is extracted for the credit risk of transfer above the AAA level.  In addition, synthetic securitisation can overcome legal and tax issues that often prevent a funded securitisation from occurring.