A solid pipeline of subprime U.K. RMBS began marketing last week, offering investors approximately GBP2.1 billion (US$3.9 billion) of paper, which were all expected to price by Friday. Last year, tighter liability spreads led to decreased wrapped subprime RMBS volume, a trend that kicked of this year's issuance pipeline, as all of the deals on offer are marketing without wraps.

First out of the blocks was Southern Pacific Mortgages with a GBP700 million Southern Pacific Securities 2005-1 Plc, offered in U.S. dollar, euro and sterling denominations, with a total of GBP266 million of fast-pay A1 notes pricing at 8 basis points over Libor. All tranches priced within price guidance, all set tighter than levels for the two competing deals in the market last week. Further down the curve at the double-A, single-A, triple-B and double-B levels, the deal came in at three, six, 14 and 11 basis points basis points over Libor, inside RMAC-NSP4 plc, the last U.K. subprime RMBS to price in November 2004, said market sources.

Dealers released price talk on the new GMAC-RFC deal, GBP600 million RMAC 20045-NS1 plc. offering, which was expected to price by the week's end. The triple-A dollar based notes were offered at 7 basis points over Libor and the triple-A euro and sterling notes were both talked at 13 to 14 basis points over. Also marketing was a GBP125 million subprime RMBS from Rooftop Mortgages dubbed Farringdon Mortgages No.1 Plc. Rooftop is a relative newcomer in the market jointly owned by Bear Stearns and Crown Asset Management. Rooftop began originating mortgage loans in 2003. With this limited track record, the credit enhancement levels backing the deal are set higher than those for both the RMAC and Southern Mortgages transactions. The triple-A notes are split between two tranches, talked at 11 basis points over Libor and 17 basis points.

Kensington Group also began marketing its GBP800 million RMS 20 deal backed by U.K. nonconforming mortgages. RMS 20 will offer GBP320 million of 1.2-year, A1 notes denominated in dollars, euros and sterling. It also includes a GBP360 million, 3.3-year A2 class, offered in euros and sterling.

"Subprime mortgage lending has flourished in recent years but with the prospect of house price declines, new loan origination may suffer this year," reported analysts at Dresdner Kleinwort Wassestein in their 2005 outlook. "As a result of this, and because of the sensitivity of the new lending/funding-through-securitization balance for sub-prime originators, we expect subprime MBS issuance in 2005 to be slightly down on 2004. Elsewhere we note that subprime mortgage products are also in their infancy outside the U.K., and, in time,

we may see some non-U.K. subprime securitization."

On the CMBS front...

Outside of the subprime universe, investors got more CMBS paper served up with the GBP2 billion refinancing of Morgan Stanley's Broadgate Financing transaction. The deal shifts the existing Mortgage Finance Broadgate Plc, from a secure/unsecured structure to a fully secured structure. "This creates a more conventional structure, and provides greater certainty about the effectiveness of any workout process required," report analysts at FitchRatings. "The structure used was complicated by restrictions on the amount of secured debt that The British Land Co., the ultimate borrower and property owner, could issue. Following changes to their banking arrangements in 2004, [British Land] is now able to issue more secured debt and will consequently amend the structure to a fully secured loan structure."

Four new properties have been added to the securitization pool, which mean another GBP650 million of notes are made available, in addition to the notes being refinanced. The refinancing aims to reduce British Land's cost of debt, provide improved prepayment provisions and extends the weighted average maturity of British Land's debt to 16.6 years from 13.8 years. "Given the size of the deal, secondary liquidity should be better than in many other CMBS deals," said Dresdner analysts. "Based on the structure, the underlying and the current state of the of the London office property market, we think that the junior tranches offer good value in the short-to-medium term."

Also queuing in CMBS line-up is the Merrill Lynch-GMAC Commercial Mortgage Bank, co-originated, Taurus CMBS No.1. The GBP186.5 million transaction has its 4.3-year, class A notes offered in the high teens over Libor and the spilt-rated, class B notes talked in the mid-20 basis point area over. The deal also has four subordinated tranches being offered as well.

It's the first time two banks have married collateral pools together under one securitization structure. "ELOC 19, included loans from other mortgage originators but the loans had been outright purchased by the originating bank unlike the Taurus deal where the loans are clearly on offer from two different banks," said one source.

The reference pool is backed by five loans that have maturities between five and seven years.

Unlike sequential pay structures, which typically amortize the senior notes substantially or fully by the point at which there is exposure to a single loan, under the Taurus structure, principal on all classes of notes will be outstanding when there is single loan concentration risk, according to Fitch. The credit enhancement has been tailored to ensure that each loan can stand alone. The results allowed Fitch to assess the default probability and likely loss severity on a loan-by-loan basis.

While the structure does reduce the chance of an upgrade, it does maintain excess spread in the structure. Fitch said it was the first time it had approached a pool transaction CMBS deal with a single borrower approach. "The structure allows players who might not ordinarily consider securitization because of portfolio limitations to considering paring up with larger players in the market - it opens the door to a new market segment," said one market source.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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