Saturation threat in prime RMBS means every little helps in finding alternatives
Banks and building societies must find new markets now
The prime UK RMBS market is flying. Deals are pricing inside covered bonds and orders are piling up, but surely it can’t last forever. Issuance is bound to increase as the Bank of England's Term Funding SME (TFSME) rolls off. Investors — mostly other UK bank treasuries anyway — will begin to fill up. Fortunately, some issuers are already planning to deal with the problem.
Some have already begun to make forays down the three most obvious avenues. First, front-loading issuance to get ahead of TFSME redemptions; second diversifying into other asset classes to reach deeper into the securitization investor base; and third, by accessing other currencies, most importantly the dollar market.
The bulk of TFSME maturities don’t come until late 2025, but anyone thinking that means they can afford to wait to dust off their RMBS shelves is mistaken. The volume of issuance in 2023 was more than double that of 2022. All the early signs point to another jump after the market made its fastest start in years.
So far that rise has mostly been a story of existing issuers stepping up their programmes and old issuers returning, but there may also be prospective new issuers choosing their moment. They can least afford to wait for competition to intensify and investor saturation to begin to show. The proverbial iron is hot right now; they must strike it.
Relying solely on prime RMBS doesn’t allow issuers to access the full depth of the securitization investor pool. Certain buyers swim only in more distant waters from the cool channel of the UK prime market. There they feed on the more exotic flora of other asset classes that pay juicier spreads.
OneSavings Bank’s buy-to-let RMBS, PMF 2024–1, which is slated to be priced on Wednesday, is one example. The programme has been revamped for this deal with no mezzanine tranches, suggesting funding is the primary motivation for the deal.
It is no surprise to see that an issuer tied to a storied UK mass retailer, where choice is king, has also started playing the diversification game. Tesco Bank was the only bank issuer to bring a credit ABS deal in 2023, returning with the first deals from its Delamare shelf since 2020. It raised £550m ($700m) across two deals, despite the second being blown off course by headlines that the issuer was up for sale. It is another asset class issuers should look at.
More than 60% of Tesco’s £300m first deal went to real money investor, in contrast with just 36.5% of Permanent 2024–1, the market opening prime RMBS this year from Lloyds. Other dormant credit card ABS shelves exist, such as Lloyds’ Penarth Master Issuer.
The last Penarth deal, in 2019, had three triple-A tranches. Moreover, one of those tranches was in dollars. That is one market that UK banks and building societies failed to reach in 2023. It will be essential to remedy that.
Back in July, Lloyds told GlobalCapital that high cross-currency basis swap costs were keeping the bank out of dollar RMBS. There are other challenges too. UK RMBS is tightly priced, meaning spread expectations in US are wider. In addition, macro uncertainty, and not to mention a recent banking crisis, have given US investors enough to worry about considering underwriting risk in their own country.
But with rates forecast to fall the difficulties have begun to ease and in November credit card lender NewDay became the first UK issuer, since its own deal in April 2022, to place a dollar tranche.
The issuer said it was happy to pay up to pull it off and rightly so. Accessing international markets is a long-term game won by being a reliable issuer in whom investors are wiling to spend time and research, knowing there will be deals. The broader buyer base overall can then be used to lower the cost of funding overall.
Nationwide, the last issuer to place dollar prime RMBS paper, appears to have ruled out of issuing in the currency for the year with its ‘stock and drop’ scheme. It retained a £1.7bn three tranche sterling deal in November, with the intention of placing it this year.
Nevertheless, the return of the UK RMBS dollar tranches is getting closer. Certainly, expect UK bank treasury representation at the market's big winter conference, SF Vegas, which runs in late February. Perhaps the first deals to follow can securitize the credit card receivables generated at the conference by UK bankers and issuers.
Not all of these funding avenues are easily accessed. Fighting for US investors' attention is hard when they have an all consuming market of their own — and that's only if the the pricing makes sense in the first place. Investors in other asset classes will need time to get to grips with what they are being sold.
But the work must begin in earnest and issuers need to think of themselves more as supermarkets than specialists.