As the Northern Rock saga rolls on, UK mortgage lenders that had frequented the now-shuttered residential mortgage-backed securities market are seeking to fortify funding lines. Alliance & Leicester, one of the country’s largest lenders, with a £41 billion ($82 billion) prime mortgage portfolio, is one operation that has been identified as perhaps having been too dependent on the RMBS market.
Alliance & Leicester are lining up funding for 2008
To avoid falling victim to the funding crisis that brought about Northern Rocks downfall, Alliance & Leicester has put in place additional funding facilities, a large proportion of which are backed by its residential mortgage assets. According to Alliance & Leicesters 2007 results statement released in February, these new facilities have enabled it to fund all its customer loans and advances with customer deposits and wholesale funding with a duration of more than six months. The lender started this process at the end of 2007 and has now pre-funded its maturing medium-term wholesale funding, commercial paper and certificates of deposit into the first quarter of 2009.
This coup comes just in time, as Spains Grupo Santander is said to be waiting in the wings to add Alliance & Leicester to its UK portfolio. Only a few details are available of how Alliance & Leicester has accomplished the feat of stabilizing its funding situation in what have been horrible market conditions. In addition to reports of a £4 billion two-year financing from Credit Suisse backed by part of its mortgage book, the Midlands-based lender has secured £10 billion from a consortium of banks. The £10 billion comes from a static securitization of prime mortgages Alliance & Leicester has put in place called Bracken. That deal was used as collateral for different facilities and represents a large chunk of the lenders on-balance-sheet mortgages. A bank spokeswoman did not return calls seeking comment.
"We understand there are some isolated cases of mortgage lenders putting a lot of private RMBS structures in place [backed by their mortgage books]," says William Howard Davies, director and senior RMBS and consumer ABS analyst at Deutsche Bank in London. "Quite simply it allows them to have triple-A rated RMBS collateral backing a term facility of a shorter tenor. Despite concerns over liquidity, lenders can show they have facilities in place to provide sufficient liquidity through 2008."
Out of the woods
Another UK lender, Bradford & Bingley, has made similar moves to meet its funding requirements in the absence of the public RMBS and covered bond markets. It completed a sale of commercial mortgages last year and despite problems with some treasury investments linked to US sub-prime, the lender looks in decent shape for the time being. An uptick in mortgage delinquencies means, however, that Bradford & Bingley is not yet out of the woods.
"[Bradford & Bingley] has to be cautious about its funding and therefore its lending, which can create a vicious circle whereby it tightens its lending criteria and more loans go into arrears," says Birgit Specht, managing director in Citis London securitized products strategy group. "Weve seen that already as its loans in arrears have increased quite a bit."
With no signs of the public RMBS market opening in the near term, creative funding solutions will continue to be the best options for those UK and European mortgage lenders that can afford them. Triple-A tranches of prime European RMBS deals are trading at about 70 basis points for two-year paper, making new deals economically unviable.
Analysts confirm that behind the scenes banks are busily securitizing mortgages to use for repo funding at central banks. But for RMBS deals to return to the public stage, spreads would have to come in by 20bp to 50bp at the AAA level to make deals work economically and compensate investors for the risk.
"There are likely to be pockets of reverse enquiries and semi-private transactions over the next couple of months," says Howard Davies. "These should add a degree of stability to whats going on and at least offer some pricing reference points."
Whether there will be any public RMBS issuance remains firmly in doubt. Investors are worried about market fundamentals. Weakening economies and the prospect of greater numbers of mortgages in arrears mean 2008-vintage RMBSs might not appeal.
"At the present, were in a situation where technicals are very weak and fundamentals are starting to weaken, too," says Specht. "That is not great for a new issue to come to the public market."