05/22/2009

UK Lenders Line Up Guaranteed MBS Issues

Private-sector demand for U.K. mortgage bonds is about to get a major test, as issuers tap into a new government-guarantee program.

A handful of issuers, rumored to include RBS and Lloyds TSB, are preparing to float several billion dollars of bonds backed by prime-quality home loans in the region and insured by the U.K. Treasury. They've already begun contacting investors, with a focus on U.S. money-market funds and corporate-buying programs that can pick up $150 million to $200 million of securities at a time.

The deals are expected to price before U.K. financial-market players take their usual summer breaks, beginning in early August. But if the issues are still in the market at that time, it's possible that they'll linger until trading picks back up in September.

The offerings would mark the first large wave of U.K. mortgage securitizations to make the rounds with private-sector investors in more than a year, in a shift away from a Bank of England program that has been propping up most deal production by writing repurchase lines against retained securities. But government support will still be at play.

That's because the issues would be among the first crafted for a program, enacted April 22, through which U.K. Treasury will guarantee up to £50 billion ($77.6 billion) of principal and interest on mortgage bonds. Holders of the guaranteed bonds would be able to sell their covered holdings back to the issuers at no loss, with the Treasury making up any shortfall. Qualifying deals must be backed by prime-quality loans written after Jan. 1, 2008. Issuers will pay fees equal to 25 bp over median spreads on 5-year credit-default swaps written against their unsecured debt from July 2, 2007, through July 1, 2008.

The guaranteed bonds would come from existing securitization trusts.

Investors said it would make sense for the first banks out of the gate to include RBS and Lloyds, as both are essentially already under government control. The U.K. took a 70% stake in RBS this year, and assumed up to 77% ownership of Lloyds following the bank's catastrophic takeover of HBOS - a government-brokered deal that created the region's largest mortgage-lending operation.

Early glimpses of the upcoming securitizations indicate a heavy dose of short-dated tranches that would roll over at maturity, some as quickly as in 30 days, in a bid to attract U.S. buyers who have been seeking safety in short-dated Treasury securities. Most past U.K. mortgage bonds have carried maturities of 1-7 years.

As far as government guarantees on the short-dated classes, "the tranches are probably going to come with some form of a rolling put option," one investor said.

However the end product turns out, the prospect of U.K. mortgage bonds finding their way onto the open market is creating a buzz among buysiders on both sides of the Atlantic. Only a trickle of European securitizations have been offered to private-sector investors since early 2008, when Bank of England intervened with its repurchase program following the creation of a similar effort from the European Central Bank.

In fact, only $178 billion of European securitizations were sold to investors last year, according to Asset-Backed Alert's ABS Database. Another $855 billion was funded through the central-bank programs, which like the new guarantee program were created to counteract effects of the worldwide credit crisis on lenders.

Talk of the upcoming issues has already helped bump up secondary-market prices for U.K. mortgage bonds, albeit in light trading. Spreads on triple-A-rated securities with 5-year maturities have come in about 100 bp over the last month or so due to those factors and others, and are now changing hands around 275 bp over Libor.

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