Newbies sniff out securitization as deconsolidation becomes the game

The lenders, believed to be primarily UK mortgage banks and co-operatives, are looking at RMBS as a potential means of trimming their leverage ratios and upping their capital positions.

Cheaper forms of funding like covered bonds and senior unsecured have suppressed the UK RMBS market since the crisis, and well-capitalised bank lenders don’t need to use securitization to improve capital levels at the margin.

“ABS can be a somewhat painful process for lenders, in terms of having to provide loan-level data, ongoing deal support, skin in the game and the costs of setting a deal up compared to other funding alternatives,” said Gareth Davies, analyst at JP Morgan.

But banks constrained by capital and leverage ratios, as well as challenger lenders, are looking to follow in the footsteps of Co-operative Bank, which recently sold the entire capital stack of a non-conforming RMBS to slim down its balance sheet.

“It isn’t a new idea. We’ve been misusing ABS as a funding-only tool, and the fact that a risk transfer deal is unusual is a reflection of how strange the market has become,” Davies said.

A banker in discussions with potential issuers said: “The theme is that, going forward, securitization is more for capital purposes, as well as for leverage ratios.”

“You can have lots of low-risk assets and plenty of capital, for example, but you have a leverage ratio you can’t go beyond,” the banker said, adding that getting assets off balance sheet allows lenders to maintain relationships with borrowing clients.

Leverage ratios for UK banks don’t go into effect until 2019, but lenders are already preparing for implementation.

At least two unnamed lenders are mulling the idea of synthetic securitizations, according to a banker in discussions with them. Others are looking at cash transactions.

Another banker in similar discussions said that a handful of the lenders mulling the idea of securitization have never issued before. Deconsolidation trades are rare — only Co-op and Crédit Foncier de France have been known to use securitization for balance sheet deconsolidation in the last year — but they offer investors a full capital stack of bonds. 

And in an undersupplied market in which the European Central Bank has become a major player, that bodes well for supply-hungry buyers. Most European-marketed ABS offer only one or two tranches publicly, with the issuer often retaining the rest.

Investors piled into Co-op’s £1.5bn trade, sold in April. That was originally sized at £1.19bn, but grew because of strong demand.