Irish mortgage lender First Active stepped backed into the market recently with the first European securitization of flexible buy-to-let mortgages. Called First Flexible No.2, the GBP300 million ($449 million) transaction was backed mainly by a portfolio of over 4,000 flexible buy-to-let mortgages originated by First Active, almost 70% of which were concentrated in London and the South East of England. J.P. Morgan acted as lead manager.

Flexible mortgages allow borrowers to prepay a part of their principal balance at any time - rather than traditional mortgage products where payments are paid to a fixed schedule - and those prepayments can also be used as a line of credit for borrowers at any point in the future. The outstanding balance on the mortgages used in this deal amounts to GBP296.1 million.

First Flexible No.2 was split into two tranches. The GBP276 million A tranche - with an average life of five years - was rated Aaa and AAA by Moody's Investors Service and Fitch IBCA, and priced at 29 basis points over one-month Libor. The GBP24 million B-notes were rated A2 by Moody's and A by Fitch and priced at 80 over.

An ABS official at J.P. Morgan was very happy with the success of the deal. "The transaction went extremely well," she said. "It was important because it showed the market is there for newer products. The flexible buy-to-let nature of the collateral was a totally new product for investors to get their heads round, so we're delighted that they could take this on board."

The official was pleased that both tranches were oversubscribed, particularly for the single-A rated tranche. "For the junior notes I was a little bit skeptical," she said. "But I think the transaction benefited from the timing, because supply is down in the market for retail assets. It's not so much that investors were desperate for assets but I think they had time to really consider this transaction."

It may now be a good time for other potential issuers to hit the market, bearing in mind that this year has been relatively quiet in terms of the quantity of deals. "We've seen an absence of majors' this year. We haven't seen had the frequent issuers; the Australians, the Abbey Nationals or even the MBNAs," the official continued. "I wouldn't say people are short of assets, but they are definitely prepared to look."

Because of this shortfall, the official believes that issuers can achieve more favorable pricing at the moment. "That's certainly true for this deal," she continued. "The last time First Active came to market, you were looking at plus 30 for the triple-A notes and around 85 for the single-A notes."

The official added that the deal was bought by the usual investor types, but she said was surprised how much interest there was on the continent for a sterling deal. "What I'm seeing is that a lot of continental investors have developed real flexibility in what they can take," she said. "A lot of them can fund in sterling and that is very encouraging."

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