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.
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|