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Capital Markets

RMBS: UK brings first-loss innovation

Northern Rock's first-loss product marks a new step in capital management from large-scale RMBS issuers

UK bank Northern Rock is seeking to release capital via a securitization of first-loss pieces from its Granite programme. The deal, which is expected this autumn via Barclays Capital and Lehman Brothers, represents a new asset class for the European investor base. Previous transactions of this kind have been conducted privately.

"When we do a securitization the ratings agencies require we retain a first-loss/reserve fund. This acts as a drain on Northern Rock's overall capital," says David Johnson, operational director, securitization, at Northern Rock.

No calling

The retention of a first-loss piece on the balance sheet results is extremely inefficient from a regulatory capital standpoint, considering that the first-loss tranche represents 1.5% of a typical deal. Northern Rock started its securitization programme in 1995 and none of the deals has been called yet. With £25 billion ($45 billion) outstanding it could release about £375 million of tier 1 capital.

Northern Rock securitization volumes 1999 to 2005

Pricing date Deal value $m No of tranches % share
1999 963 2 1.4

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