Investors in mortgage bonds from failed U.K. lender Northern Rock Plc will be paid back in full on debt that once traded at less than 10 percent of its sale price.
About 7 billion pounds ($10 billion) worth of residential mortgage-backed securities will be redeemed from Thursday, with the bulk of the notes to be paid back on Dec. 21, according to data compiled by Bloomberg. The securitizations, which are known as Granite, are being unwound after Cerberus Capital Management bought the underlying debt from the U.K. government.
Northern Rock funded about 50 billion pounds of U.K. mortgages through the Granite notes, becoming Britain’s fifth-largest home-loan lender before succumbing to the first bank run in the country in 140 years. The securities collapsed as the bank was nationalized and was no longer able to provide an equity cushion to protect bondholders.
“It’s a fairytale ending, not least because the bonds will be redeemed at par having survived the insolvency of the originator as well as the deep economic recession that followed,” said Ganesh Rajendra, head of fixed income, credit and mortgage strategy at Royal Bank of Scotland Group Plc in London. “The redemption of the Granite bonds is the final chapter of what was the bellwether of the European securitization market for much of the 2000s.”
Granite bonds sold in 2007 will be redeemed first, according to a Dec. 7 statement from Granite Master Issuer Plc, which sold the debt.
Cerberus, which saw off competition from bidders including CarVal Investors LLC, Deutsche Bank AG and Blackstone Group LP, hasn’t said what it intends to do with the Granite mortgages, prompting investor speculation that some of the loans will be repackaged into new securities.
“With Cerberus buying back the bonds, a lot of capital should be freed up to be reinvested in the market,” said Tracy Chen, a Philadelphia-based money manager at Brandywine Global Investment Management, which oversees $66 billion of assets. “That will provide a good support to the market.”