Last week Co-operative Bank made its RMBS debut, becoming the first UK issuer since 2008 that wouldn’t be considered too big to fail.
Until the launch of Silk Road Finance No 1, the only UK institutions to bring mortgage backed securitisations were Lloyds Banking Group and Nationwide, both of which clearly have explicit or implicit government support. The Co-op Bank’s assets are a small fraction of its larger rivals, even after its acquisition of Britannia Building Society, from which Silk Road’s mortgages originate.
The deal was therefore looked at as something of a bellwether for the health of the broader UK RMBS market — a vital question given the looming £300bn funding gap highlighted by the Council of Mortgage Lenders among others. Would small lenders — those facing most difficulty in other wholesale markets such as senior unsecured and covered bonds — be able to tap securitisation markets in size?
The results of this ambitious test of the market proved mixed — unsurprising given the wider turmoil caused by fears over sovereign risk in general and the UK fiscal situation in particular.
On the positive side, Co-op was able to raise over £2bn of funding at margins scarcely higher than those of its much larger rivals — 140bp over Libor. On the negative side, of the £500m initially available to the general investing public — some £2bn having been effectively pre-placed with JPMorgan — only £375m was taken up at a price the issuer was willing to pay.
Clearly there isn’t a bottomless pool of money just waiting for second and third tier issuers to hit the market, even if they bring high quality collateral. Silk Road’s appeal, however, was limited by its floating rate format. When Lloyds raised £2.5bn with Permanent 2010-1 in late January, only £200m came from sterling floating rate investors. Issuers able to access fixed rate or euro buyers — including many with dormant securitisation programmes — will be drawing from a much deeper well.
The market will have an early test of that theory with the announcement this afternoon of a new RMBS from Fosse, the master trust of Alliance & Leicester (now part of Santander UK). The deal is offering three tranches to investors in fixed and floating rate sterling and floating rate euros. It will also be the first UK RMBS since the crisis without a put option protecting investors from extension risk, and hence the closest this sector has come to a traditional securitisation.
Consequently it will offer the clearest demonstration yet of the depth of demand across the whole European investor base for UK mortgage debt. Given the challenges they face, even Santander’s rivals will hope it goes well.