But drill down a little further, and limit the votes to issuers alone, and Economic Master Issuer vaults into the top spot. That’s presumably because the finance teams at other RMBS issuers recognise the potential of this deal, and the structure behind it, to enhance the capabilities of the biggest asset class in European securitization – UK RMBS.
The deal represents a bottom-up reimagining of the master trust structure, masterminded by Clifford Chance’s Christopher Walsh — starting with a blank sheet of paper, and considering how best to meet the needs of issuers and investors alike.
Issuers want efficient, flexible funding vehicles, which consume little collateral, need minimal legal work, and can tap the market quickly. They want triggers which won’t lock them out of structures. Investors want predictable cashflows and predictable maturities — or at least, they will pay up for these features compared to the usual complexity of a pass-through securitizations.
Coventry Building Society’s EMI delivers both, by stripping out the layers of SPVs and legal complexity underlying the traditional, pre-2007 master trust vehicles, and taking advantage of better, cleaner tax treatment available under UK law. Yet it also allows issuers to keep hold of prepayment risk, allowing investors to buy scheduled amortisation or soft bullet RMBS bonds.
Coventry and its counsel, Dentons, worked for years to adapt the basic idea to Coventry’s needs, evolving the structure from concept to a shelf which was ready to go.
The result is something akin to a covered bond, but easier on the encumbrance — a shelf structure that can be tapped at will, issuing bonds with fixed cashflows which price as tight as any securitized instrument.
It takes time and effort to set up the structure in the first place, but, in effect, it brings the benefits of an old style master trust to a potentially far wider group of smaller issuing institutions.
Banks and building societies have not been major figures in last year’s RMBS market, thanks to abundant central bank funding alternatives, but they could be again, as BoE funding rolls off. When they do, RMBS needs to be as competitive as possible to win back some of the ground already lost to covered bonds.
Selling senior notes in a UK prime RMBS is not necessarily one of the hardest jobs in European securitization, but that’s not to undermine the efforts of arrangers HSBC and Lloyds. Any new structure requires months of additional work ahead of the deal, additional structuring work, plus time and effort to explain it when investor marketing began in earnest.
It was also particularly crucial for the success of the structure to show that it could price in line with existing master trusts — effectively upgrading Coventry’s RMBS peer group from its fellow standalone building society issuers to the best-in-class prints regularly achieved by the likes of Nationwide and Santander from their old-style master trust vehicles.
Nobody has yet replicated EMI in structure — though Barclays has a shelf ready to go (potentially breaking a decade-long silence in own-issued RMBS) — but that says more about the state of bank borrowing needs than about the structure itself, which is a slam-dunk win for issuers that decide to put it in place.
Even in securitization, which has as much innovation as any capital markets product out there, it’s rare to see someone take the time and effort to rebuild something from first principles. Precedent and tradition almost always play a big part, and breaking this cycle to inaugurate a new deal structure is a lot of effort for only a few basis points of reward.
But the arrangers, issuers and law firms which do this deserve plaudits. There’s no doubt about it — EMI is a genuinely new template for one of the largest asset classes in securitization, and for that reason, it is GlobalCapital’s ABS Deal of the Year 2020.
