Increased scale helps Dilosk move on from mixed pools
Recent STS deals attracted greater bank treasury bids, smoothing executions
Irish mortgage specialist Dilosk hopes to issue at least two RMBS deals a year, separated into owner occupied and buy-to-let mortgage pools, the lender’s CEO and co-founder Fergal McGrath told GlobalCapital, after its eighth deal was priced on January 25.
“[Future issuance] depends on how much we can originate,” McGrath said. “The ideal scenario is at a minimum of one owner occupied and one buy-to-let transaction a year.”
Dilosk was founded in 2013 but lends through the older ICS Mortgages brand, which it bought from Bank of Ireland in 2014, along with a €223m loan book. Its first RMBS deal, Dilosk 1, came in 2015. Last year, it issued its first RMBS that qualified for the EU’s ‘simple, transparent and standardised’ hallmark.
“Having the STS and LCR [liquidity coverage ratio] classification helps to attract new investors, especially bank treasuries into the programme,” McGrath said. “In the early stages of Dilosk, we mixed owner occupied and buy-to-let in the securitization pools. As the business has evolved, greater scale enables us to separate them, which helps with the messaging and overall execution.”
To qualify for an ‘STS’ label, the pool cannot be a mix of owner occupied and buy-to-let mortgages, as it has to be ‘standardised’.
'STS' boosts latest deal
The most recent deal, €416m Dilosk 8, was the second to have the 'STS' stamp and took the total amount Dilosk has raised in the securitization market to €2.4bn. It was popular with investors.
“We saw strong demand throughout the capital structure, which enabled us to have two rounds of tightening,” McGrath said. “Even after the two rounds of tightening, there was very little price sensitivity and the final coverage remained strong from 2.2 times at the ‘A’s down to over 7.5 times for the lower tranches.
“We were very happy with that execution. We managed to place all notes down to the Class ‘F’ and Class ‘X’.”
Indeed, the class ‘X’ tranche, which receives excess spread, was doubled in size from 0.5% to 1%. Coverage on the seniors did dip slightly, though, from a peak of 2.5 times covered. Initial pricing thoughts (IPTs) were mid to high 70bp, but the tranche ended up at 65bp over three month Euribor.
One syndicate banker said: “It’s always the case [that a few orders fall] when you move that much from IPTs.” McGrath said there were trade-offs in pushing the spread tighter.
“It’s always a balance between having a lower cost of funding and optimal return on capital, which allows us to originate mortgages at a competitive rate and ensure there’s good liquidity in the Dilosk shelf,” he said. “We have a lot of repeat investors over the years and we are cognisant of secondary market liquidity even though many of our investors appear to be buy to hold.”
Dilosk picked a good moment to come to market, as all the early euro deals this year have been in demand. Timing deals for Dilosk, though, is about more than just certainty of execution.
“Timing is a function of several factors,” McGrath said. “Do we have a pool of primarily newly originated mortgages, ideally with an optimal size due to the fixed costs involved with a securitization transaction. Other factors include whether we have call dates due on other Dilosk deals and ultimately the overall market sentiment.
“We may continue to warehouse assets if we feel the market isn’t right and we’ve had good support from our warehouse funders in doing that in the past, so I do believe past track record is key in our business.”
Performance strong despite rates
Asset performance has been a key theme in European ABS recently, as cost of living pressures and rising interest rates have squeezed affordability. Nevertheless, McGrath was happy with how Dilosk’s approximately €1.6bn loan book is performing.
“We’ve experienced zero losses at the equity level of all securitizations since inception, of which Dilosk invests in,” he said. “Performance has been very good despite the increase in rates.
“Irish unemployment has remained very low and the economy and demographics have been supportive. There is a chronic shortage of housing in Ireland, which underpins price growth, albeit this has somewhat moderated. Those factors have helped the performance.”