HBOS attempts a jump-start

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HBOS deserves the gratitude of its rivals for its attempt at a UK RMBS benchmark, but it may prove futile in the short term.

The refrain has been unilateral and increasingly plaintive: "The European securitization market cannot recover until one of the UK master trusts comes back to the market". With spreads having shot from around 9 basis points over Libor to triple digits last summer it is hardly a surprise that those master trust issuers were less than enthusiastic to assume the role of trailblazer. So when HBOS announced a small (£500 million) issuance from its own Permanent UK RMBS master trust in May it was both a sign of how far the market had fallen and a signal seized upon by some that the worst could really be over.

HBOS is unequivocal that this was an attempt to set a benchmark pure and simple. This Permanent trade tries to establish a level at which European ABS can trade again. It also aims to restore a shred of normality to the RMBS market and enable more esoteric asset classes such as CMBS to find some sort of level.

The move is well-intentioned, any benefit may be some time coming. How can securitization hope to return as a realistic funding option for bank lenders while spreads remain so high? The banks’ efforts to rebuild equity capital have distracted attention from their funding struggles.

Research by Citi’s credit products strategist, Matt King, points out that, along with the huge write-downs, banks have been steadily capital raising during the credit crunch. Citi wrote down $37.3 billion on its sub-prime exposure and took a $5.6 billion credit loss between the third quarter of 2007 and May 19 this year. But over the same period, it also raised $44.1 billion. UBS has written off $38.2 billion and raised $28.2 billion; RBS has written off $15.2 billion and raised $23.4 billion. Citi calculates that while $379.2 billion has been written down by banks during the credit crunch, they have also managed to raise $257 billion.

Funding remains a challenge. Securitization became such a fundraising force for one reason and one reason alone – it was cheap. And 85bp for triple-A paper (even in the present capital-constrained environment) isn’t cheap. Despite HBOS’s best intentions, the RMBS market in Europe will only be kick-started if spreads come in significantly – HBOS itself has indicated that it would not issue for funding at present levels. And the portents for spread tightening are not positive. First, because of the slumping housing markets in the UK and Spain, and secondly, because of the disappearance of the investors that bought this paper: the ABCP conduits and SIVs.