Saturday, September 26, 2009

UK RMBS relaunch

Posted in the Financial Times:

It’s the credit crunch circle of life. The residential mortgage-backed securities market that pushed the world into a financial hole is set to reopen. Lloyds Banking Group is betting on renewed confidence in UK house prices as it brings £2.8bn of AAA-rated RMBSs to market. Although these are not subprime packages, no chances are being taken with the sale.

The safety checklist is almost as thorough as for a space launch. Already lined up are “real money” investors, including pension and managed funds; no exotic highly leveraged vehicles here. And the pricing – one tranche at 170 basis points over Euribor and the rest at 180bp over Libor – is swoonworthy. Investors are set to receive about 20 times the return they could have expected before the crisis. This, though, is still about half the levels at which similar securities traded at the height of the crisis. A successful issue should see market spreads tighten further.

The slow return to life of the European asset-backed market is welcome; the International Monetary Fund has called its revival critical for wider economic recovery. Specialised issues from Tesco and Land Securities in June and July were followed by a €500m vehicle lease-backed issue from Volkswagen. The Lloyds issue, at six times the size of VW’s, represents an attempt at mainstream resuscitation.

Some self-regulation is ensured by the need for reputational security. Although broader initiatives seeking originators to take the first slice of losses remain just talk, 8 per cent of this issue will be held in cash; Lloyds will use it to absorb any losses. One ghost of the past does remain, though. Investment bankers will take their fees from the transaction’s completion, not the bonds’ subsequent performance. With gold on the table, a glint is back in their eyes.

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