For a market that often seems on the verge of hysteria at the merest hint of positivity and which for the past six months has been obsessed with looking for any sign of a “green shoot”, the tail-end of September finally brought some tangible good news.
This came in the form of Lloyds Banking Group’s announcement that it had completed a £4bn securitisation deal – the first truly significant deal of its kind since the credit crunch hit and the market for securitisations went to hell in a hand basket.
Most will be aware of the details. The package comprised AAA-rated “prime” homeloans from Halifax and the deal was the first issued by Lloyds since May 2008.
The question is, does this mean the European market for securitisations is well and truly open again or is it merely a flash in the pan? Can other institutions draw confidence from the securitisation process having been completed and is this proof-positive that there are investors out there who would welcome further issues?
The answer to these questions is half way between yes and wait and see.
Kudos should first go to the treasury team at Lloyds for taking on the first UK residential mortgage-backed securitisation since Moses was a child – at least that’s what it feels like.
The transaction was heavily marketed beforehand and, as reported elsewhere, Lloyds was successful in getting a few key investors to speak for fairly big tranches of the £4bn. Having said that, there was widespread interest from across the investment community and the deal attracted investors from 16 countries although most were from the UK and Europe.
A further important point is that not only was the issue a successful transaction but it has also obtained a premium of 30 to 40 basis points inside the pricing level.
This might lead you to believe the market is now up and running again and that the next transaction is being finalised as we speak and will be out next week. The Lloyds deal would seem to suggest that the right deals can be “got away”. The fact is that there is a lot of money sitting out there that needs to go some-where. After all, returns from other investments have been whittled away and therefore investors are looking for a home for their money which will deliver a better return.
But while the deal is good news, I think it unlikely that there will be any further significant UK mortgage-backed securitisations before the end of year.
Although there is appetite from some significant investors, many of whom are sitting on big cash reserves, this does not mean the markets are fully open and working in the same way they did before. Indeed, one must seriously doubt whether we will ever return to those heady days of 2006 and 2007.
Not surprisingly, credit will be a major issue, with most RMBS deals involving AAA-rated loans. The investors in the market are true investment specialists and will be looking hard at what they are buying.
In the short term at least, it seems likely that the Lloyds deal is not going to have much of an impact.
Beyond this, and because investors will be looking for AAA-rated assets, lenders will still only want to lend to those borrowers they consider to be the lowest risk.
I think it unlikely that there will be any further mortgage-backed securitisations before the end of the year
This means that the mortgage criteria pattern of late will continue, with tighter requirements involving lower LTVs, and verified and low loan to incomes.
We should not forget the damage that has been inflicted and lenders are still repairing damaged balance sheets.
Many are now asking whether the Lloyds deal will herald the return of former lenders or a new breed entering the UK market.
There are whispers that new lenders without the legacy of existing portfolios – many of which are “under water” even for those deals on SVR – are poised to enter the market and sweep all before them.
I am not quite sure who these white knights are but perhaps that is the point of a white knight – they only reveal themselves when they have saved the situation.
Certainly there is a great opportunity for anyone sitting on funds to make some great margins at relatively low risk but unless anyone has a strategic reason for entering the market or can definitely see an exit route and recovery of the money they invest, I am not sure there will be many (if any) takers yet.
I am certain, however, that some institutions will be considering the UK mortgage market and it is only a matter of time before they realise the opportunities.
You can put money on the fact that at that point there will be a “me too” stampede which will drive down price and probably impact on risk.
Then this will happen? I am afraid the answer to that is impossible to know at this point in time.