Kensington Mortgages, the U.K. non-conforming mortgage lender, is preparing to bring to market what is widely believed to be the first residential mortgage-backed securities deal with a remarketable tranche denominated in sterling.
"Including this tranche allows us to diversify our investor base, as it appeals to money market funds in the U.K. that so far haven't participated in RMBS deals," said Simon Kingdon, group finance director. Kensington's £700 million RMS 18 transaction will include a £280 million equivalent remarketable A1 tranche with a 0.8 year weighted average life, to be split between dollars and sterling, and is expected to be priced this week or next. Morgan Stanley and Royal Bank of Scotland are joint lead underwriters.
Mike Slevin, director in financial institution securitization at RBS in London, explained that the structure represents a win-win scenario for both the issuer and money market investors. "At LIBOR flat, the remarketable tranche offers cheaper funding to Kensington over term securitization, and money market managers get a pick-up over [the London Inter-Bank Bid Rate], which is their base, for a 12-month defined maturity," he said.
Kensington Mortgages pioneered the use of a U.S. dollar remarketable tranche on its RMS 17 deal in February. GMAC-RFC, the financing arm of General Motors, included a remarketable U.S. dollar tranche for the first time on a European deal two weeks ago.
While the advantages to a U.K. issuer are clear, some bankers question the buyside response to the deal this side of the Atlantic. Richard Mann, head of ABS syndicate at Barclays Capital in London, joint lead on RMS 16, said, "Sterling is the base currency for U.K. issuers, and it's preferable for them to eliminate swap costs; the question is whether U.K. money market funds will pay up for the certainty of a one-year or less life, given that there is no legislation equivalent to the Securities and Exchange Commission's Rule 2a7 in the U.S."
