U.K.'s Open Door for Foreign Buyers Closing on Mortgage Bondsby
New type of issuer selling mortgage-backed securities
Deals are less likely to include notes in euros, dollars
Just about anything in the U.K. -- from football clubs to shopping malls and houses -- can be acquired with ease by foreign investors. That’s changing for mortgage bonds.
The U.K.’s 70 billion-pound ($100 billion) market for the securities may soon become largely off limits to buyers from outside the country, according to JPMorgan Chase & Co. That’s because Britain’s biggest banks, which use securitization vehicles to transform their pound-denominated mortgage loans into securities priced in dollars or euros, are being replaced by issuers that can’t issue in those currencies as easily.
Lenders reduced sales of the debt after stricter regulatory capital demands made it more expensive to securitize loans and as central banks started providing cheaper funding. The residential mortgage-backed securities market is now dominated by smaller banks set up since the financial crisis to compete with the established players, as well as firms repackaging older loan portfolios.
“The market risks becoming much more reliant on the domestic investor base,” said Gareth Davies, head of European asset-backed securities research at JPMorgan in London. “If you’re a credit investor in Munich, Paris or Boston, the chances are you don’t have the capacity or desire to buy sterling bonds, so you will naturally be excluded from U.K. RMBS deals that don’t offer euro or dollar securities.”
Since the late 1990s, U.K. lenders from Lloyds Banking Group Plc to Nationwide Building Society have used securitization vehicles known as master trusts to help fund mortgage lending. Sporting names such as Arkle and Silverstone, the structures give lenders the flexibility to offer multiple securities, denominated in various currencies, using one pool of assets.
The new banks typically don’t have master trusts and instead sell debt via one-time issuing vehicles, with the majority of the notes priced in pounds, said JPMorgan’s Davies. Master-trust deals typically offered about 70 percent of notes in euros or dollars, he said.
Even so, the structure of new deals doesn’t completely limit the sale of foreign currency debt. Recent transactions from TSB Banking Group Plc and Virgin Money Holdings (UK) Plc have featured portions denominated in dollars and euros.
“A shortage of master trust deals doesn’t have to mean that there will be no euro notes to buy,” said Annemieke Coldeweijer, The Hague, Netherlands-based head of securitized investments at NN Investment Partners, which manages about 180 billion euros ($195 billion). “There’s a yield pickup available in U.K. assets, so I hope to have ongoing access to that market.”
The volume of outstanding bonds sold by the trusts has shrunk to 18 billion pounds from 140 billion pounds in October 2008, and sales totaled just 4.1 billion pounds last year from a peak of 62 billion pounds in 2006, according to data compiled by JPMorgan. Overall issuance of U.K. mortgage bonds will reach a five-year high of as much as 19 billion pounds in 2016, with most new issuance coming from smaller banks and from sales of older loan portfolios, according to Citigroup Inc.
Issuance of RMBS by the U.K.’s biggest mortgage lenders declined after a Bank of England program introduced in 2012 to cut borrowing costs for small businesses and homebuyers provided banks with a cheaper source of funds. The takeover or collapse of some of the largest issuers of the debt, such as HBOS Plc and Northern Rock Plc, also reduced the number of firms selling the notes.
“With stand-alone deals, investors need to look at a new pool of assets each time,” said Annabel Schaafsma, a structured finance analyst at Moody’s Investors Service. “Master trusts’ bonds were based on the same pool of assets, which made due diligence a lot easier.”