GlobalCapital spoke to Batool Arif, relationship director in securitized products at Lloyds Banking Group, about the state of UK RMBS.
GC: It was great to see your return to the RMBS market this year with Permanent 2023-1. Why are you and other lenders now restarting your programmes?
BA: After a prolonged slumber during the pandemic, the UK’s prime RMBS market has bounced back to life.
Fully marketed RMBS issuance in the year-to-date of £6.0 billion is ahead of the £5.0 billion raised during the same period of 2022. Moreover, at £3.8 billion, prime issuance accounts for a much larger chunk of the total — 64% compared to around 28% in the same period of 2022.
During the pandemic, many prime borrowers relied on cheap central bank funding from the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME). Now, with the TFSME closed and starting to roll off, large-scale prime issuance has returned.
However, specialist lenders were unable to access this facility and, lacking a deposit-base, continued to access the RMBS market, contributing the bulk of transaction volumes throughout the period.
GC: That Permanent deal was a great success. What can we read into it?
BA: That deal was our first RMBS for four years and the largest deal since then. What can we read into it? Well, the evolution of the transaction during marketing says much about investor appetite for the return of sizeable prime deals.
Having announced the transaction at £500m, strong demand allowed the deal to be doubled in size despite pricing being tightened from 55bp to 52bp over Sonia. Even at the tighter price, the book closed 1.6 times covered.
Domestic demand was strong enough to build a robust book with 27 accounts ultimately allocated bonds. As usual for prime transactions, bank treasuries dominated the book, representing 69% of allocations, with asset managers taking most of the remainder.
GC: It’s good to hear prime demand is so strong. What is the outlook for those specialist lenders who kept the market open while the TFSME was active?
BA: With households facing squeezed budgets and a more challenging macro-economic environment, the specialist lending sector will continue to be an important contributor to the mortgage lending market.
Asset managers and other real money investors remain active in mezzanine debt and specialist lender issuance has continued to rebound after wobbles following the ‘mini-budget’ in September 2022 and the collapse of Silicon Valley Bank and Credit Suisse in March.
We support specialist lenders through warehousing, hedging bond arranging and distribution, and can help issuers understand changing market conditions and investors’ evolving expectations regarding structural features and mortgage underwriting processes.
GC: How are the mortgage and RMBS markets changing?
BA: While lenders coming to market have found an appreciative audience, much has changed from past years.
Firstly, the mortgage market is less active. As UK Finance notes in its Q1 Review, lending to both first-time buyers and home movers fell to the lowest level since Spring 2020.
Secondly, interest rates are at levels unseen for decades. Following higher than expected inflation in April, markets now anticipate further rate hikes by the Bank of England. Two-year and five-year swap rates have risen, compressing RMBS net margins.
GC: How are specialist lenders going to fare?
BA: Despite some challenges in the market, specialist lender issuance has continued to rebound. In April, for example, specialist UK lender Lendco achieved an impressive spread for its £312m deal with us, despite it coming during a busy week for issuance.
Foundation Home Loans, the buy-to-let (BTL) and specialist lending unit, raised £447m in May using its Twin Bridges platform and also found a receptive market. The managers, which included Lloyds, were able to price all tranches significantly tighter than initial guidance.
We are seeing a new economic environment and it may continue to be challenging, but the outlook appears likely to support specialists.