Northern Rock, the UK mortgage bank, launched the first mortgage securitisation from its revamped Granite master trust (on Wednesday). The deal achieved record tight pricing for European residential MBS and at £4.5bn equivalent is the bank's largest ever securitisation. The innovative structure will allow Northern Rock to issue ?delinked' securitisations, in which different layers of the capital structure can be sold at different times. Barclays Capital, Citigroup and Merrill Lynch advised Northern Rock on the changes to Granite's structure, and were joint bookrunners for the securitisation. The delinking technique was invented for the big US credit Card master trusts and imported to Europe by credit card issuer MBNA Europe Bank in July last year. Granite is the first mortgage securitisation to use this delinked technology. However, this week Northern Rock issued across the capital structure from triple-A to triple-B, as in its previous issues. ?We intend to launch full issues with the same tranches as in the past, but the new structure gives us room to consider private placements and come to the market more quickly,? said David Johnson, head of securitisation at Northern Rock in Newcastle. ?However, at the moment we have no plans to issue single tranches outside the regular capital structure.? Big triple-Bs expensive Bankers say mortgage lenders are unlikely to take delinkage as far as credit card issuers, because mortgages provide far slimmer margins than high yielding credit card receivables. A large triple-B RMBS issued some time ahead of senior notes could be uneconomic. The latest Granite master trust, for example, has 45bp of excess spread, while its triple-B notes were priced at 56bp over Euribor. Another advantage of the delinked structure is the flexibility structurers have in setting average lives, allowing them to fashion tranches to fit specific pockets of investor demand at specific ratings and maturities. In this week's trade there is a long sterling denominated triple-A of 7.25 years with a soft bullet maturity, but the longest subordinated note is only 5.25 years. Granite now issues notes as series from a single SPV, called Granite Master Issuer. New notes rank pari passu with outstanding paper, and the proceeds are lent to an intermediary vehicle, Granite Finance Funding 2, which buys a beneficiary interest in the master trust. The Granite Master Issuer has been registered at the SEC as an MTN shelf, allowing the originator to issue more quickly and more cheaply. According to Justin Fox, director in Merrill Lynch's securitisation group in London, Northern Rock is the first European originator to register a shelf programme for ABS with the SEC. ?It typically took around three to four months to do a deal, but with this MTN style of documentation, it should take around four weeks,? Fox said. The bonds were sold after four teams roadshowed in the US, Europe and Asia. ?It's important to give Northern Rock credit for the thoroughness with which they approached the transaction,? said Ashley Kibblewhite, director in the global debt syndicate at Merrill Lynch in London. ?Northern Rock had eight senior members on roadshows for more than a week, demonstrating the commitment with which they approached the transaction.? The most eye-catching pricing was for the 4.63 year triple-As. Not only did the euro tranche break the 10bp barrier to price at 9bp over Euribor, but it was one basis point tighter than the $1.1bn dollar tranche of the same tenor. Dollar tranches usually price on or under euros. ?The deal clearly showed how competitive the European investor base has become, relative to US dollars,? said Richard Mann, head of ABS syndicate at Barclays Capital in London. ?The euros outperformed, but the dollars didn't underperform ? all the dollar classes were well oversubscribed,? he said. Price guidance for that euro tranche had been at 11bp over, but quickly came in to 9bp-10bp. There were over Eu4bn of orders for the notes at 10bp, and Eu3bn reported at 9bp. Around 75 accounts participated and Mann said it was very encouraging for Northern Rock that so few had dropped out at that level. And it was at the junior level that stronger European demand was especially evident, with a planned $68m triple-B folded entirely into the euro denominated piece. The tranche was sold to over 30 accounts after price guidance in the 60bp area. More tightening possible Despite benchmark pricing levels set by the transaction, spreads could have further to fall. ?I don't think anyone can accurately predict where a floor should be,? said Mann. ?Collateral performance remains extremely strong for all of the regular issuers, and delinquencies are not causing concern at triple-B level, let alone triple-A.? n The next UK RMBS to come to market will be Standard Life's latest issue from its Lothian Mortgages master trust. Joint leads JP Morgan and Deutsche Bank will start marketing the deal, expected to be sized at the lower end of £1bn to £1.5bn equivalent, in the second week of February. It will be denominated in dollars, euros and sterling. n A new player will shortly join the Euro ABCP market in the form of National Australia Bank, which is planning a hybrid conduit vehicle for launch later this year. NAB will use the new vehicle both for credit arbitrage and to offer conduit financing for its corporate clients. The conduit will be overseen by Tony Gioulis, formerly head of conduit origination at HSBC, who NAB hired last year to lead its securitisation team. The bank expects that the deal will use both silo principles and to sell an expected loss piece. n Rumours circulated this week that Italian bank UniCredito may shortly come to market with its first, and long awaited, securitisation of residential mortgages. The bank is thought to have awarded the underwriting mandate to Morgan Stanley and UniCredit Banca Mobiliare. This could not be confirmed before EuroWeek went to press.
January 21, 2005
