Monday, October 26, 2009

Securitisation datapoint du jour, Nationwide edition

Posted on FT's Alphaville by

You have to love this headline from the Guardian on Sunday, even if you disagree with the premise: “Nationwide revives bond market that caused crunch”.

Beyond specious headlines, the Guardian reported that UK mortgage lender Nationwide intends to issue a £3.3bn prime residential mortgage backed security - Silverstone 2009-1 - in what would be only the second such deal this year. HBOS reopened the European RMBS market with its £4bn Permanent 2009-1 deal in September.

Reuters, which reported on upcoming Nationwide deal earlier in October, had more detail on the banks involved:

Barclays Capital, Citi and JP Morgan are joint-lead managers on the sterling-denominated residential mortgage-backed securitisation (RMBS), the manager at one of the banks in charge of the planned sale said.

Separately, Reuters’ International Financing Review publication analysed the mortgage lender’s decision to opt for an RMBS issue rather than a covered bond “given that the latter would be likely to offer much cheaper funding”. Emphasis FT Alphaville’s:

In the secondary market, Nationwide’s three-year covered bonds trade around the mid-swaps plus 80bp to 90bp region, whereas most UK prime RMBS trades in the Libor plus 130bp area. The choice of funding tool demonstrates that spreads are not the only consideration and that Nationwide knows the importance of maintaining funding diversity.

In the recent third-quarter ABS confidence survey from JP Morgan the same point was made. A “significant proportion of originators [83%], do not see covered bonds as a substitute for RMBS issuance”, the report said. Nevertheless, nearly three-quarters of those originators felt RMBS spreads would need to tighten (39% by up to 50bp and 44% by 50bp-100bp) before they would return to the primary market.

Another factor affecting the choice that prospective issuers have to make is that covered bonds may soon become less efficient as a funding tool, relative to RMBS.

The rating agencies are increasingly concerned about the ability of issuers to meet bullet repayments when covered bonds mature and it seems likely that S&P will be the first agency to insist that issuing banks put more collateral into their covered deals in order to maintain a Triple A rating, especially those banks with subordinate debt ratings below Double A.

According to Barclays Capital analyst Fritz Engelhard, at least 60% of covered bonds rated by S&P would be subject to a downgrade without extra assets being added to pools. As Nationwide has subordinated debt ratings of BBB+ (S&P), Baa3 (Moody’s) and A+ (Fitch), its covered bonds may well be one of the 60% at risk.

Moreover, as IFR pointed out, the lack of a euro-denominated tranche could be a stumbling block:

This exclusion met a lukewarm response from a major European investor, who argued that the absence of euro-denominated notes made the deal a “non-event” for Continental buyers.


The absence of a euro piece underscores what is widely considered a major stumbling block in the way of a recovery in the European securitisation market. Of the few remaining eligible counterparties that have the capacity to write swaps, even fewer actually want the risk, even though 35bp fees can now be earned, versus 2bp-3bp in pre-crisis times.

The change in perceived risk assessment followed the collapse of Lehman Brothers, in which it became clear that providers would need to post collateral at the point when they were least able to do so. This “cliff risk” is so-called because liabilities can step-jump, creating a negative feedback loop, where the stressed swap counterparty must post ever-increasing amounts of collateral - with fatal consequences.

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