J.P. Morgan priced the latest mortgage deal from U.K. bank Northern Rock at levels not seen for approaching two years and was still overwhelmed by demand from investors desperate for a mainstream mortgage deal, backed by good quality mortgages.

The deal - Northern Rock's second - was called Granite 00-1, totaled GBP750 million ($1.2 billion) and was split into a senior GBP694.8 million tranche, rated AAA/Aaa by Standard & Poor's and Moody's Investors Service; a GBP32.7 million AA/Aa3 piece; and a chunk worth GBP22.5 million rated BBB/Baa.

The spread on the senior 3.7 year average life notes was 25 over three-month Libor, which is three basis points tighter than the bank's first deal that was launched in September last year and a similarly structured deal from Abbey National that launched in October. Even at that price it tightened by one or two basis points in secondary trading, one trader noted.

The spreads on the seven-year soft bullet B and C tranches were 45 basis points over and 130 basis points over respectively, again easily the tightest spreads for such paper since the summer of 1998.

However, the tight pricing obviously put off few investors as the tranches were oversubscribed between two and four times, said J.P. Morgan ABS trader Muri Rhee, with the greatest demand in relative terms for the triple-B notes.

"We could have priced it much tighter, but then we would have given up the broadness of the distribution," Rhee said. "We had discussions with the issuer to increase the size. Unfortunately, they were unable to increase it this time, but they may bring a larger deal next time."

Rhee said that 60% of the senior tranche was placed with U.K. investors, with the balance going to continental accounts, while 80% of the two junior pieces was sold to continentals and Americans. "Continental and U.S. investors see value in U.K. mortgages, not only for the quality but also for the yield pick-up relative to the U.S. equivalent."

J.P. Morgan brought in ING Barings, Greenwich NatWest and Salomon Smith Barney as co-leads - they each got 10% of the senior bonds. Experts agreed that the reason for the tight pricing was not just that the market has not seen vanilla U.K. mortgage-backed paper since October last year, but also because of the excellent quality of the mortgage pool backing the deal.

The mortgages have an average loan-to-value ratio of just 67.5% and extremely low loss levels. "The collateral quality on this pool probably surpasses any U.K. mortgage pool," said a source at one of the co-leads. "And because Northern Rock view securitization as programmatic they made sure that this was a great pool, because they want investors to come back."

Eve Flotron of J.P. Morgan's ABS research team said that one of the pleasing aspects of the deal from a wider market perspective was the demand for the lower tranches, as a lack of demand for subordinated paper is something that has held the European market back in the past

BUPA's Back

Other U.K. deals included the second coming of a GBP235 million nursing home backed deal for British United Provident Association (BUPA), via Merrill Lynch. The transaction, called UK Care No. 1, was split into a GBP175 million senior tranche, rated AAA by S&P and Duff & Phelps Credit Rating Co., and a single-A rated piece worth GBP60 million.

The deal had been pulled from the market last November as the company balked at the spreads that would have been necessary to clear the deal in an environment which saw spreads heading out and other similar fixed rate, sterling long-dated deals coming to market.

The pricing was 180 basis points over Gilts for the senior tranche and 300 over for the junior piece, justifying the decision to postpone the deal.

A Merrill official explained that the pricing on the senior chunk was 20 basis points inside Care Homes 3, the last deal from the sector that was launched in November, something made more impressive since swap and corporate spreads for long-dated sterling had widened in recent weeks.

A BUPA spokesman agreed that the decision to postpone had been the right one, adding that the average all-in cost of the transaction was 6.29%, around 2% cheaper than the bank debt that the proceeds will repay.

Celts Return

In Ireland, meanwhile, serial securitizer First Active issued the fifth deal in its Celtic Residential Irish Mortgages series, in a transaction worth e300 million ($298 milion). The deal, via BNP Paribas, was split into two tranches: a e282 million tranche rated triple-A by Moody's and Fitch IBCA, and a e18 million A2/A piece.

Pricing was three-month Euribor plus 29 basis points for the 5.1 year average life senior tranche and 77 over for the 7.4 year junior piece.

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