Monster mortgage sales to drive UK mart
The sale of more than £26bn in mortgage portfolios could drive the UK RMBS business for the rest of the year — but the anticipated supply is already weighing on UK non-conforming spreads.
Co-op’s £6bn Optimum portfolio, GE Capital’s UK home lending book (£7.7bn) and Northern Rock Asset Management’s £13bn Granite portfolio could all find new owners by the end of the year, with securitization likely to provide the funding.
Market participants say that smaller portfolios are also trading actively, and finding homes in the non-bank sector.
The precedent for the jumbo size deals is NRAM’s Slate portfolio, the sale of which closed last year. The UK bad bank said in its annual results on Tuesday that “the book was sold through a competitive sales process which saw a high level of interest and resulted in a sale price in excess of par. The proceeds included a premium of around £55m over the book value, representing good value for the taxpayer.”
JP Morgan bought the £2.7bn book and securitized it in a pair of issues named Slate, with CarVal Investors in the equity of the deal.
GlobalCapital understands Morgan Stanley had teamed up with UK challenger OneSavings Bank and was the second placed bidder on Slate, with the recently spun-off TSB also in the final rounds. Morgan Stanley and OneSavings are said to be working together again on the upcoming deals.
JP Morgan is also likely sitting on a £2bn book of UK equity-release mortgages which it previously bought from NRAM. It began structuring a securitization of the book in 2013, but it never made it to market.
Goldman Sachs and Blackstone are reported to be working together on a bid for Granite, while TPG is also putting together a bid. Sky News recently reported that RBS was looking to buy the Granite book, but attendees at the Global ABS conference in Barcelona treated this prospect with derision.
“All the big banks and all the big private equity shops want a piece of this business,” said a market participant. “The large private equity funds have a huge appetite, and will be very aggressively pushing this out in the market for funding.”
Blackstone, which teamed up with TPG to buy Kensington Mortgages from Investec, added mortgage servicer Acenden to the package afterwards. The revamped mortgage platform has already issued two RMBS deals this year.
“A lot of non-conforming secondary portfolio trading has been done in the past 12-18 months, a lot will continue to happen, and I’d expect a lot to quickly find its way to the securitization market,” said Simon Allsop, head of securitzation at Precise Mortgages, part of the Elliot Capital Management-backed Charter Court Financial Services, speaking in an afternoon panel.
Despite the hype around these UK mega-deals, private equity sponsors may need to tread carefully. Bob Paterson, head of ABS syndicate at Lloyds, said on the same panel that some investors viewed regular non-bank RMBS issuers, such Pepper Mortgages or Paragon, as more likely to call their deals than financial sponsors.
The Granite portfolio presents a particular challenge for aspiring bidders, because it is already securitized, at highly attractive pre-crisis levels. According to one investor, speaking on the sidelines of the conference, there is no way a bank could offer leverage to a private equity bidder at a cost close to the weighted cost of the Granite notes.
But leaving Granite in place means that the equity does not get any principal payments — all mortgage repayments go to paying the notes down. So a purchaser would either need to restructure the trust, or accept only interest payment cashflows until the notes paid down.
A London-based head of securitization said that banks would be unlikely to offer leverage against the equity in Granite, for credit control reasons.
In a different panel, Sriram Soundararajan, head of European ABS strategy at Jefferies, said that the potential supply coming down the pipe in non-conforming UK RMBS had pushed the bottom of the capital structure in existing deals tens of basis points wider.
“Once there is more clarity on the portfolio sales, I’d expect a few basis points to be shaved off,” he said. “Any snapback from a successful Greece resolution would be more sluggish in UK non-conforming.”
Granite is a prime portfolio, but the mortgages were high loan-to-value at origination and the bonds generally trade wider than the best UK shelves.