HBOS spells out funding plans

UK banking group HBOS has received many plaudits for its innovative financing in 2003. Deals have included covered bonds, securitization programmes and retail-driven tier 1 capital deals. When you have had to fund £55 billion of asset growth in the past 12 months alone, you are always going to be on the look-out for new funding methods. "In 2003 we had to fund this growth and lengthen wholesale maturities, but we didn't want to over issue in any sector," said HBOS head of funding and liquidity Tony Main at a Credit Suisse First Boston credit conference held in December.

Main said the next step for the UK's biggest mortgage and savings bank will be a big push into the structured medium-term note private-placement market. "We haven't done much on that, and we are analyzing what the swaps situation will be, but we reckon we could get $10 billion a year out of the market, which will reduce pressure on our vanilla senior debt." To aid this process, Main says HBOS is planning a moderate expansion in the US, although the bank is not planning dramatic asset growth. "We will do this mostly for better access to funding there rather than to load on new assets."

HBOS now plans to look at which other assets could be securitized, as part of its 2004 strategy to term out and reduce its reliance on short-term debt. "We could easily fund our credit cards, auto loans, SME loans, social housing, unsecured personal financing and commercial mortgages this way," says Main.

"We have built a team of 10 to 15 securitization professionals to look at our balance sheet and the best things to be securitized. We need to think about how much collateral we can put into securitization without affecting our senior debt rating. We also think that there could be an increased role for synthetic securitization to manage risk and regulatory capital."

He adds, though, that the use of securitization is limited by rating agency attitudes to how much risk it is necessary to transfer for capital relief from this funding, potential price volatility and the dangers of over-collateralization. "We need £2 of mortgage assets for each £1 of funding we get through Permanent 2 [HBOS's highest-rated securitization vehicle], which is clearly unsustainable."

Main points out that the implementation of Basle II, with its more stringent control of regulatory capital for booked assets, and the introduction of covered bonds as a viable asset class in the UK market, diminish the importance of securitization. He says, though, that the dilemma arises of getting the balance right between securitization and covered bonds, the new asset class that HBOS pioneered the use of in the UK in 2003. "The market is beginning to question how much volatility in securitization there will be – it will be interesting to see the balance of securitization and covered bonds in the future," says Main.

Both offer longer-term financing, credit enhancement and access to new investor groups. However, covered bonds give the double-A issuer access to triple-A funding, with longer possible maturities, a shorter time to market, less over-collateralization and access to a new pool of triple-A liquidity investors.

Main also points out the lower cost of funding in this market, where a five-year securitization deal costs HBOS about 25 basis points over Libor, whereas its 10-year covered bonds cost around 10bp over.

Despite the push away from vanilla debt, Main stresses HBOS's commitment to doing regular benchmark vanilla issues in euros and dollars as well as opportunistically tapping the sterling, Canadian dollar, Swiss franc and yen markets. "The main question we have to address," he says, "is what is the cost of liquidity in the balance sheet."