April 2007
Bank funding: HBOS keeps its options open
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Robert Plehn, HBOS: satisfying his capital needs with cheaper sources |
HBOS has incorporated a 2008 call option into the pre-placed mezzanine tranches of its latest Permanent RMBS transaction, which could be an indication of the largest UK mortgage originator’s issuance plans post-Basle II: a possible cessation of sub-triple-A RMBS issuance. "The cost of getting capital relief from the issuance of sub-triple-A paper for a prime residential mortgage portfolio is relatively expensive for us," says Robert Plehn, head of securitization and covered bonds at HBOS Treasury Services in London. "Given our alternate source of capital and the expected lower risk weightings associated with our prime UK residential mortgage book we may be able to satisfy our capital needs through other, cheaper sources." HBOS issues between £8 billion and £10 billion ($19.6 billion) of RMBS paper through its Permanent master trust each year. Some 93% of this is triple-A rated, but given the size of the programme if the issuer decides to stop all sub-triple A issuance it will remove around £700 million of paper from the mezz market each year.
The beginning of the end
Scrapping sub-triple-A RMBS issuance is an option for a bank such as HBOS as it has a very high quality mortgage book and can therefore rely on triple-A RMBS and covered bond issuance to fund its book. The bank is the largest covered bond issuer in the UK, and is expanding its covered bond programme after the well-publicized recent breakthrough into the US market. Given the number of UK mortgage banks that have recently established covered bond programmes (see The covered bond party gets bigger , Euromoney April 2006), if all the lenders followed suit the HBOS move could herald not only a further boost to the UK covered bond market but also the beginning of the end for mezzanine master trust RMBS in the UK.
This does not, however, seem likely. Northern Rock, for example, has not incorporated Basle II call options into its sub-triple A RMBS paper. But it is inevitable that even if tranches are not called, some issuers may choose to simply let these mezz tranches roll off: full Basle II implementation does not come into force until 2010. But the trend will not necessarily mean a large fillip to the covered bond market – issuers will want to maintain investor diversification and will therefore continue to fund via RMBS – albeit triple-A – in significant volume. The most significant impact will be on the mezzanine ABS market, where ABS CDO buyers are chasing already scarce collateral – which is about to get scarcer.
