U.K. Buys Northern Rock Mortgage Bonds Before Asset Sale

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  • Buybacks follow due diligence in preparation for loan sales
  • Government seeks to sell 13 billion pounds of mortgages

The U.K. government bought back bonds to tidy up a securitization program created by nationalized lender Northern Rock in preparation for a sale of 13 billion pounds ($21 billion) of the underlying mortgages.

U.K. Asset Resolution Ltd., which is overseeing the asset sales for the government, said 315 million pounds of the notes were repaid, the biggest purchases in any month for more than five years. The bonds were part of Granite, the vehicle through which Northern Rock funded almost 50 billion pounds worth of U.K. mortgages before it was nationalized seven years ago.

Granite is facing greater scrutiny because of government plans to sell off the underlying loans. The bond payments were made after Northern Rock removed some of the mortgages in the asset pool when it discovered they didn’t comply with the terms of the securitization, according to Neil Vanham, a secured funding manager at UKAR.

Chancellor of the Exchequer George Osborne announced the sale of the mortgages backing the securitization in March to help pay down the country’s national debt. Goldman Sachs Group Inc., Blackstone Group LP, Och-Ziff Capital Management and TPG are part of one group of bidders interested in buying the loans, according to people with knowledge of the matter.

More Scrutiny

Holders of $111.7 million Class A4 bonds sold in 2005 saw the principal amount of their notes reduced by $14 million, the biggest monthly reduction since January 2010, according to data compiled by Bloomberg. More than 30 million euros ($34 million) of Granite’s 247.4 million-euro Class A6 2006 notes were also repaid, the most in 5 1/2 years, the data show.

“Given the increased attention on Granite, it makes sense that there is more scrutiny on the underlying loans in the trust,” said Dipesh Mehta, a director of securitization research at Barclays Plc in London.

A first round of bids for the Granite mortgages has closed and a second should start by the end of July, UKAR Chief Executive Officer Richard Banks said last week. The sale will be completed in the second quarter of 2016 at the earliest, Banks said.

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