The banks are back in UK securitization.
It’s been a long time coming but deals are now being executed as a matter of routine. This January, Lloyds and Santander had deals done and dusted by the end of the year’s third working day. Moreover, they came with solid respective size increases of £200m and £250m versus the initially mooted deal sizes, and no dramatic spread tightening.
Contrast that with last year. There was almost giddy excitement as Lloyds built up to the return of Permanent. When the deal finally arrived the size was doubled to £1bn, the book was still 1.6 times covered and the spread was tightened inside covered bonds. Marketing formally began on May 11 and it took until May 17 to get the deal priced.
Having a backbone of prime issuance is a good thing for RMBS. For one thing, having big names depend on the market entrenches its importance, and regular prime RMBS issuance also gives the calendar more structure.
By recent standards, securitization deals have come at a lightning pace during the start of 2024. It is also unusual to see UK RMBS out first. A Brass 11 reoffer did start the public deals in 2023, but before that, it was typically European autos.
It makes sense though that deals with minimal execution risk take the temperature of the market before others join in. Indeed, the post-summer 2023 restart began with deals from two of the surest asset classes in existence: Société Générale’s German auto shelf, Red & Black, and Santander’s prime UK RMBS shelf, Holmes.
Issuers can meaningfully discuss a pickup to prime, given they have visibility on what that means. Doing so provides more clarity on whether pricing is driven purely by views of their collateral or whether they are being swept along by the overall market.
Further, considering the precipitous drop in buy-to-let originations, it is no stretch to think that the majority of new UK RMBS collateral could be in prime deals from banks this year, though legacy refinancings will continue as well, adding significant volume.
That's a market that looks very different to the last few years, and so rather than celebrate the return of the banks, some may worry about them taking up the bid for specialist deals. The sector has already been hammered by rising rates, which have strained funding models.
Just as lenders gain some respite on that front, more prime supply may mean some bank treasuries, which had been expanding their activities, confine themselves to prime only again, leaving buy-to-let as the domain of asset managers, who, as a rule of thumb, expect wider spreads.
Such a view is short-termist. Big names bring in investors, catch the eye of growth-hungry politicians and in turn help everyone benefit from a boost in demand. The UK transport secretary, Mark Harper, saw fit to praise a deal between Octopus EV and Lloyds last year.
A £250m UK BTL RMBS would be very unlikely to draw such eyes. and it hard to say if investors would even abandon small issuers in this market anyway. Those with a track record of issuance will have established curves and so will benefit from being more liquid names.
But perhaps the TSFME driven securitization revival will play out just as the market dreamt it.