* Funds need leverage to meet bank price demands
* More mortgage portfolios to trade to funds
* Securitisation can clean up the mess it created
By Owen Sanderson
LONDON, Aug 2 (IFR) - The re-emergence of cheap
securitisation funding should allow funds to help clean up UK
banks' balance sheets, allowing them to bid more aggressively
for legacy assets.
UK banks have wanted to sell legacy mortgage assets, and
funds to buy them, for at least two years, but the funds need to
be able to get cheap leverage to pay the prices banks demand for
the assets. For a bank with mortgages marked at 100, any sale
below that level is a direct capital hit.
This means banks are incentivised to hang onto assets, and
because they have abundant cheap liquidity, can easily do so.
Using securitisation rather than bank leverage cuts the cost of
leverage, and allows funds to bid closer to the levels banks
want to sell at.
"I'd expect to see a pickup in portfolio trades using
securitisation financing - there are still huge volumes of
mortgages in non-core books in the UK," said Alex Maddox,
business origination and development director at Acenden, an
independent servicer, and former head of European mortgage
trading at Deutsche Bank.
The gains in generic UK non-conforming spreads, which have
rallied from 265bp to 175bp in the last year, according to
analysts from JP Morgan, have created the opportunity.
"More efficient senior financing levels the playing field
between vendors' cost of capital and funds' cost of capital,"
said Matt Gilmour, managing director at Mars Capital. "The
biggest competitor on any trade is always the vendor
GAME OF THRONES
Three recent deals underline this trend. This week, Citi
underwrote the GBP117.74m Thrones 2013-1, which funds a
portfolio for Mars Capital. The deal carries a coupon of
three-month Libor plus 150bp for a 4.41-year average life.
However, it may be sold at a tighter spread than that - it is on
Citi's balance sheet and will be placed at variable prices in
the secondary market, rather than through primary syndication.
"We do think will put some reinvigorated interest
back into whole loan trading, and we might see more assets come
up as vendors think they can sell closer to where they have
assets marked," said Gilmour. "But it won't be to the tune of
billions or a flood of issues in the short term."
Thrones follows the GBP117.7m Virgil Mortgage No. 1, which
finances a book of re-performing loans held by Fortress
Investment Group, and the GBP220.2m Alba 2013-1, which financed
a book for Pamplona Capital Management.
These deals are tiny compared to the outstanding volume of
mortgages in non-core books, but the economics are at least
"Securitisation takeouts at 150bp should give confidence to
funds looking for mortgages that they can finance the portfolios
cheaply, and encourage banks to offer cost-effective bridge
finance," said Maddox.
Having securitisation available is important because bank
leverage is much more expensive. The precise numbers are always
kept very private, but it is a substantial spread. Even when a
bank is planning to bridge the fund to a capital markets exit,
such as through securitisation, it has to price the facility as
though it is term debt, in case the capital markets deal fails.
While securitisation is now helping to transfer assets away
from unwilling holders, it also helped create the overhang.
Pre-crisis, lending to non-traditional borrowers with poor
documentation, adverse credit or high LTVs was heavily reliant
on securitisation markets.
When the market shut, this left huge volumes of mortgages
remaining in the hands of institutions that do not want them -
creating an opportunity where hedge funds and private equity
thought there should be bargains. GE Capital has around GBP10bn
of unsecuritised UK mortgages which it has said are non-core,
while UK Asset Resolution, the holding company for the UK
nationalised banks, has GBP40bn outside its securitisations
Investment banks such as Lehman Brothers directly owned
"non-conforming" lenders - in Lehman's case, Southern Pacific
Mortgages, Preferred Mortgages and the London Mortgage Company.
But Merrill Lynch, Bear Stearns, Morgan Stanley and Deutsche all
owned UK non-conforming originators.
Some of these holders have reasons not to sell - UKAR has
zero or close to zero cost of capital, noted Gilmour, and should
be demanding top dollar for assets on behalf of the tax payer,
rather than dumping them quickly.
But plenty do. Thrones 2013-1 finances a portfolio from
Heritable Bank, a subsidiary of failed Icelandic institution
Landsbanki. It has been in administration since October 2008.
Administrators Ernst & Young opened the tender for this
portfolio in 2012, with Mars winning the bids and completing in