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The return of securitisation

Lloyds Banking Group’s oversubscribed £4bn securitisation last week has been welcomed as a positive sign of investor confidence returning.

The deal was the first from any European issuer in the past 12 months.

Checkmate Mortgages chief executive Stephen Knight says: “I think the impact of the Lloyds’ deal could be very, very significant. Until it was announced, the general consensus was we did not know whether the securitisation market would return and if so when.

“For it to be oversubscribed is a very valuable event because it shows there is more demand out there than available supply.

Knight says the deal originally looked as though it would pay investors Libor plus 1.85 per cent but because of the high demand this came down to around Libor plus 1.2-1.3 per cent.

He says: “If the thing had flopped, if the pricing in the secondary market had increased rather than reduced, it would have been bad news.”

First Action Finance head of communications Jonathan Cornell agrees it is an important stepping-stone to recovery and emphasises the importance of it being oversubscribed.

He says: “I am sure the terms they were offering were very sweet and very generous but the fact that there was more appetite out there for this kind of deal than the actual volume of portfolio up for grabs is a very positive sign. It was a reasonably big amount, £4bn, in a UK market of £160bn, that is about 2.5 percent of the market.”

But Home Funding chief executive Tony Ward is less enthusiastic about the wider significance of the the deal. “In itself, it means nothing but it is a sign of more positive things coming back.”

Ward says there are particular aspects in the way that the deal was structured that made it a success which are not typical of securitisations as we knew them before the credit crunchHe says: “I do not think you can look at this deal as a typical transaction. In no small part, this deal is successful because of the Lloyds Bank five-year put option, which is not normal in a securitisation. This means investors can surrender those notes to Lloyds and demand repayment in five years time. They clearly had to do this to give certainty to investors in a still pretty illiquid market.”

Knight agrees that it was not a typical deal and says it was similar to the type of structure seen in the 1980s when securitisations first began. He says: “These were very simple structures, you had a large reserve and assets were AAA.”

He says only big banks like Lloyds would be able to offer the guarantee to buy the book back after five years.

Yet experts are hopeful that the deal could lead other lenders to follow suit. The Bank of England’s latest credit conditions’ survey indicates that lenders expect more securitisations over the coming months.

Ward says: “There are rumours of another transaction in the pipeline.”

Cornell believes there will be a steady flow of lenders following Lloyds’ footsteps but warns: “You really do not want to be the first to fail.” He says it will be interesting to see if Lloyds tries to put together another deal like it, given that it was oversubscribed.

Knight believes the reopening of the securitisation market is the only way to plug the lending shortfall, as lenders cannot do this through deposits alone.

He says: “This year, lending is going to be around £145bn. We think the market needs at least £200bn, a £60bn shortfall, and the six major lenders are already doing 85 per cent of the market.

He says: “That shortfall will only be made up by the international capital markets via securitisation programs. The investment banks I have spoken to following the news have said this has made them rethink their timing for when the securitisation market might return.”

Knight is hopeful that the availability of mortgage products could improve as a result of the deal and others like it but does not see it having an impact on pricing.

He says: “Lenders are having to keep a higher percentage of capital against these loans than previously, that has to be paid for in the mortgage margin. I do not think the FSA would allow any lender to price below a profitable return.”

The consensus view is that we are not going to see a return to the kind of securitisation deals of 2007 and before.

Ward says: “This is a slow rebuilding of investor confidence in the securitisation market. I think if you see any issues at all, you are going to see very clean mortgages put into fairly simple structures.

Exact managing director Alan Cleary says there will be no return to the old days where originators were securitising and not retaining any risk themselves. He has no doubt the securitisation market will reopen to mortgages but says the new world will be one of “bulletproof collateral” and blue-chip issuers.

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