Wednesday, March 3, 2010

UK Prepares Prime RMBS

Original posted on the Housing Wire by Diana Golobay:

Efforts to get the securitization market machine rolling again in Western banking continue despite recent hiccups in the credit markets. However, the homogeneity necessary to re-establish a global network of securitization investors, issuers and insurers remains as elusive today as when the crazy ride of the credit crisis first began.

The private-label market in the United Kingdom is showing recovery, to be sure, but arguably it is happening more on its own accord. This offers a distinction from the situation in the United States, where the Fed is withdrawing support from agency securitization. As of today, the best hope for a new US transaction appears to be in the form of a government-backed securitization, using collateral from failed banks under Federal Deposit Insurance Corp. (FDIC) receivership. Sources confirm that Barclays Capital is lead arranger on the deal though the release of information remains restricted.

The informational ups and downs are making market researchers see the asset-backed security (ABS) markets as appearing “schizophrenic” in terms of the needed evolution of structured credit markets in the United States and Europe, according to Jean-David Cirotteau, a securitization analyst at French investment bank Société Générale.

The US commercial mortgage-backed security (CMBS) market is increasingly active, for example, despite “serious problems” in commercial real estate lending, he wrote in research provided to HousingWire yesterday. As HousingWire previously reported, banks and investors met last week with a flurry of securities sales to gear up for the last opportunity to buy issues under TALF and as a result, new transactions were issued from both legacy Term Asset-Backed Loan Facility (TALF) and private-sector CMBS, Cirotteau said.

Other positives include what Cirotteau calls, “a strong pill for further recovery” in the European secondary market, especially an appeal ruling last week on French CMBS Windermere XII, a Lehman Brother entity. In France, the Court of Appeal confirmed that a creditor had the right to appeal against the safeguard proceedings, when the debtor may impose safeguards in order to renegotiate a contract or to prevent its enforcement.

“The Court of Appeal decisions strengthen the French legal securitization framework,” Cirotteau says. A strong and comprehensive judicial system for dealing with securitization conflicts was already in place in France, but after the recent proceedings, the market now knows the system works. “The strength of the Dailly security law [provisions regarding trade receivables] is validated.”

“In addition, the look-through approach at the purpose of safeguard proceedings for an SPV clarifies the jurisprudence which was untested so far,” he added.

In a further sign of market improvement, another prime UK RMBS, the £1.09bn (US$1.63bn) Fosse 2010-1, is currently on roadshow until March 3. Industry reports expect pricing of the transaction, issued by Fosse Master Issuer, later this week.

It won’t be the UK’s first issuance this year. Lloyds Banking Group in February said it priced its first RMBS issue of 2010. Strong demand from US investors drove the upsizing of the US dollar tranche from $500m to $1bn.

On the other hand, the second deal, called Silk Road Finance, the first securitization sponsored by the Co‐operative Bank received weak investor interest. Yet, despite all of the activity in the UK RMBS segment, US issuance remains quiet.

“From a fundamental point of view, the behavior of housing market in the UK has been very different from that of the US,” Cirotteau tells HousingWire. “The UK market had not evolved in such a speculative way as in the US. Although prices were hit during this cycle, people are starting to be more and more confident about the behavior of the underlying assets.”

He added: “Typically, if we’ve seen deterioration in performances and a rise in repossession overall, it’s not on a scale comparable to what has registered on the US side.”

Cirotteau said 2010 will reveal some lingering difficulties in the UK market. Many of the senior UK RMBS tranches remain well-protected, he noted.

“Still the US market is very much locked, which is also the case generally speaking in Europe, but on a more global scale,” he said. “Meaning, we’ve had a couple of UK RMBS, a couple of auto ABS, but the ABS segment of the European market is very slow to restart. Whereas, the US market is already in very strong shape, or at least is working quite properly.”

He called the difference in behavior between the US and UK RMBS segments “paradoxical,” but noted “people are more and more confident about the performances of the [UK] pools, because the yields on the notes are attractive.”

Although investors might be returning to the UK RMBS segment, as HousingWire previously discussed, the return of buy-to-hold investors in US bonds is less apparent.

The performance of the UK’s latest RMBS is likely attracting the investor interest. Cirotteau said the Fosse Master Trust bears cumulative losses of around .01% of the outstanding balance. He also noted a “fairly comfortable” level of credit enhancement.

Fitch Ratings assigned expected triple-A ratings to the three classes of the Fosse RMBS. Fitch also noted the transaction – which will likely be at least £1bn – consists of prime residential owner-occupied mortgage loans originated in the UK by Alliance & Leicester, a wholly-owned subsidiary of Banco Santander.

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