Abbey National’s eye-catching mortgage-backed securitization (MBS) programme has touched a new height with its £2.25 billion ($3.375 billion) Holmes Financing 1, the largest ever securitization of European mortgages. Brian Morrison, the bank’s director of treasury services and international, says making the bonds fully SEC registered opens up a vast investor base in the US. “This takes us into a new ball game, which is the really big market,” he says.
The latest funding follows on from three earlier deals that have made Abbey the industry benchmark. Following the launch of a £250 million pilot issue in February 1998, the Abbey MBS programme shifted into high gear last October with two £1 billion deals called Holmes 1 and 2. All the transactions, including the latest £2.25 billion deal, were lead managed by Schroder Salomon Smith Barney. Abbey says it is considering funding up to 10% of its £60 billion mortgage book through securitization.
Philip Middleton, director of banking strategy at KPMG, says the transaction illustrates the way Abbey is becoming more innovative in thinking about its business.
“The bank is in an awkward position, as it is not small enough to be a dot com play and not large enough like Barclays to sell itself as big and beautiful,” he says. “People will be looking at this one. The real question is whether the bank can Wnd more proWtable uses for that capital.”
Middleton says that attempts in the past to put similar programmes into motion had not met with much success. “Very few market participants wanted to take mortgages oV their books,” he says. “Now this could light the fuse for the development of MBS business in Europe.”
Morrison acknowledges that in the past securitization was perceived as something a bank used if it couldn’t get funding by other means.
“There was a bit of a challenge in perception to be overcome,” he says. “We expect others will be paying attention to it and that people such as Halifax will be looking at it.”
Morrison says the deal enables Abbey to diversify its funding sources and make more eYcient use of its balance sheet. “It is extremely capital eYcient and increases our return on capital. In the past you had retail and wholesale sources of funding, and to this has now been added securitization.”
So far enthusiasm for this type of transaction has been limited mainly to the mortgage banks. Last October former building society Northern Rock mandated JP Morgan to lead manage an inaugural £600 million issue, with a follow-up £750 million transaction in February of this year. The bank says it plans to securitize about £1.5 billion of mortgage assets this year.
“The success of our inaugural issue last October enhanced our ability to lend competitively-priced products to meet the needs of borrowers while maintaining capital eYciency,” says Leo Finn, Northern Rock’s chief executive.
The major clearing banks are under less pressure to follow suit, partially because they can still count on a high degree of inertia from customers who are happy to earn 1% interest on their current accounts.
“Almost all the UK mortgage banks have recognised the diYculty of relying on traditional retail funding,” says Martin Cross, analyst at Teather&Greenwood. “This is a growing game and I would expect to see a higher percentage of assets being funded from this type of securitization.”
Simultaneous with the Abbey National deal, Capital Home Loans, the UK mortgage lending subsidiary of Irish Life&Permanent, launched a £300 million deal secured mainly on buy-to-let mortgages. This follows from its £400 million MBS in November 1998, and the two together have removed nearly all the company’s mortgages oV its books.
Bank of Scotland is so far the only UK clearer to launch a major MBS transaction, an innovative £750 million deal lead managed in April, like the Abbey bond, by Salomon.
The bank put £1.65 billion of mortgages into a US-style master trust, showing its intention to revisit the market with further issuance.
It structured the equivalent of £750 million in three tranches denominated in sterling and dollars by creating a soft bullet that eVectively allocates principal redemptions on all £1.65 billion into a sinking fund.
So there is a period of accumulation of principal in order to repay the bullet maturity, and this is the total principal redemptions of the £1.65 billion.
Abbey National, as well as Bank of Scotland, has made it clear that it intends to continue using mortgage-backed securitization as a tool for balance sheet management.
“When we set up something like this it means we will use this structure again or even a more inventive one,” says Abbey’s Morrison.
“We knew there was great demand in the market, and there will be more going forward. We now have 7% of our mortgage book securitized, so there is a lot more to play with. We will do it in a steady and more structured way.”
