How not to stop a Rock rolling
Goldman Sachs’s plan to sort out Northern Rock’s securitization-dependency problem by securitizing more of its debt does have a certain irony. The mortgage lender needs to deal with its emergency funding from the Bank of England if any sort of private sector sale can take place – and securitizing it seems to be the answer.
By guaranteeing bonds backed by £24 billion of Bank of England loans, the UK government can remove the big stumbling block for any buyer of the stricken lender. There is no suggestion that there will be any attempt to recharacterize these bonds as off-balance-sheet for Eurostat purposes, and even if there were, the chances of success would be pretty much zero. State support regulations are being addressed by the payment of a fee by Northern Rock – rumoured to be £400 million to £500 million ($975 million).
Although Northern Rock relied on the wholesale funding markets to a catastrophic degree, other UK lenders have also been dependent on securitization for significant chunks of their funding. More than 20% of Abbey National’s total loan book is securitized, with Bradford & Bingley on 20%, HBOS at more than 10% and Alliance & Leicester on 10%. At the higher end of the scale, Standard Life has 40% of its total loan book securitized and buy-to-let lender Paragon an eye-watering 90%.
These mortgage lenders have all been hit by the closure of the UK RMBS market since the summer. The third quarter of the year is usually characterized by a series of multi-billion sterling issues from such issuers as Northern Rock itself, HBOS and Abbey, to name but a few. This year not a single deal has taken place – leaving UK mortgage lenders with a £30 billion gap in their funding plans where RMBS should be.
Prime UK RMBS has always been the benchmark of the securitization market in Europe, and there is almost universal opinion that any sort of market revival in the region cannot happen until one of the large UK master trust issuers successfully raises new funding.
But any tentative recovery in appetite for prime mortgage risk – of which there is absolutely no sign at all so far – would suffer severely from the sudden launch into the market of billions of government-guaranteed securities from Northern Rock. This could effectively destroy any chance of a recovery in RMBS this year.
Why would an investor buy prime RMBS when it can get a gilt-edged mortgage-backed security instead? It would be no surprise if Northern Rock’s competitors were to respond to the latest rescue plan by demanding similar support for their own fundraising efforts – something that would open up a far bigger can of worms for the UK government to deal with.
UK RMBS master trusts – Northern Rock: From hero to zero
Euromoney September 2007
Northern Rock's inability to tap the wholesale funding market is a body blow for the whole sector.