High defaults in residential mortgages backing securitised...

High defaults in residential mortgages backing securitised bonds sold by Australia's Suncorp Group (SUN) have triggered a clause that limits principal repayments for some investors, the manager of the bonds has told investors.

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 quarter. ($1 = 1.4128 Australian dollars)