09/24/2010

Lloyds, Nationwide Keep UK Supply Flowing

Look for Lloyds Banking and Nationwide Building Society to race out securitizations of fresh U.K. mortgages, now that RBS has placed a huge transaction at some of the lowest yields since the onset of the credit crisis.

Both Lloyds and Nationwide began talking to investors early this week to gauge their interest in possible deals, although both lenders wanted to see how RBS' €4.7 billion ($6.3 billion) offering would price before pulling the trigger. When the RBS bonds sold on Sept. 22, Lloyds and Nationwide liked what they saw.

Now, market players are looking for the two companies to come out with official offerings in a matter of days. Each is expected to total $2 billion to $3 billion.

The issues would add to a flow of mortgage-bond offerings that has been building across Europe this year, as lenders in the region respond to falling funding costs and growing financing needs. U.S. bankers also were watching the RBS transaction, hoping that a positive result would help rekindle still-moribund deal production among their clients. "Any good news over there bodes well for us here," one banker in the States said.

Investors have shown more appetite for European mortgage deals than comparable U.S. products, largely because the quality of the underlying credits is seen as higher. Since the start of this year, issuers have completed 19 securitizations of U.K. mortgages with a combined face value of $38.1 billion, according to Asset-Backed Alert's ABS Database. U.S. lenders have yet to place an offering backed by fresh prime-quality credits.

RBS' deal, backed by prime U.K accounts, saw a €450 million slice of one-year notes with triple-A ratings go out the door at 120 bp over Libor. Ditto for a dollar-denominated component encompassing nearly $1.2 billion of senior one-year paper. A £665 million ($1 billion) tranche with five-year lives and triple-A grades sold at 150 bp over Libor.

The pricing reflects a narrowing of spreads for U.K. mortgage-backed securities over the past month or so. For example, on Aug. 23, Lloyds sold the senior-most portion of its most recent deal at 165 bp over Libor. The €4.1 billion transaction was led by the bank's HBOS affiliate.

Nationwide was last in the market in October 2009, when it sold $5.1 billion of U.K. mortgage bonds. The senior portion of that deal priced at 5 bp over Libor, thanks to a repurchase agreement with the European Central Bank. Barclays, Citigroup and J.P. Morgan ran the books, and those same banks are expected to get the nod for Nationwide's upcoming deal.

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