HBOS, one of the U.K.'s largest mortgage lenders, is considering the possibility of issuing a covered bond. Stephen Lorimer, a director in the debt capital markets group in London, says given the size of the bank's mortgage book and the approaching Basel II guidelines, a covered bond would make sense as an alternative funding source. If HBOS were to come to market with a covered bond, it would be the first-ever in the U.K. A covered bond is bond backed by a pool of assets held on a bank's balance sheet. Lorimer emphasized no deal is imminent and declined to say what would trigger a deal. There have been rumors linking HBOS to Goldman Sachs for a deal. Bill Young, head of securitization at Goldman, did not return calls.
Lorimer says a bank interested in issuing covered bonds in the U.K. does not really need specific legislation to be enacted. He says the creation of a bankruptcy remote structure is key.
However, some industry experts note it would be preferable to have legislation in place prior to launching a covered bond. Without proper legislation, a covered bond issued in the U.K. would basically be a securitization and would not trade or be priced like a pfandbrief, notes one securitization banker. This banker did say that developing U.K. covered bond was on the agenda for all the major investment banks operating in the U.K.
There are no signs pointing to the development of a full-blown covered bond market in the U.K. outside of issuance by banks. Industry officials say HM Treasury and the Bank of England have approached investment banks about the development of a covered bond market. However, officials note the two bodies are not taking any steps to develop such a market, and have left it to the investment bankers to take the lead.
A U.K. covered bond market would give banks access to cheap funding once Basel II eliminates the capital relief that residential mortgage-backed securities currently allow. Also, under Basel II the issuance of RMBS may become more expensive because of the increased capital charges on lower-rated tranches. Covered bonds could become another tool for banks to refinance their mortgage loans.
Alexander Batchvarov, head of international securitization research at Merrill Lynch in London, says a covered bond market makes sense provided it is liquid and actively traded. One-off issuance from banks wouldn't have a lot of benefits, he adds.
