The U.K. government's move to backstop bank debt liabilities is expected to have a positive spillover effect on ABS pricing.
However, there is one key negative for securitization stemming from the pan-European bank bailout - primary volumes are unlikely to recover meaningfully in the foreseeable future. This is because banks are unwilling to issue anything beyond vanilla debt that is guaranteed, if not endorsed, by governments.
The U.K. bank rescue plan of October 2008 has centered on guaranteeing liabilities and recapitalizing the equity of capital-deficient banks; the U.K. government has implemented a comprehensive set of measures to help stabilize commercial investments in the country's banks and building societies.
The measures have been designed to provide sufficient liquidity in the short term by making new Tier 1 capital available to U.K. banks and building societies, permitting them to restructure their finances, while maintaining their support of the real economy. They are also intended to ensure that the banking system has the funds necessary to maintain lending in the medium term through a credit guarantee scheme available to eligible institutions for new short- and medium-term debt issuance.
Following the completion of these capital investments, each of the participating institutions will have a Tier 1 capital ratio of above 9%, which is well over international minimum standards. All participating institutions are eligible to take advantage of the government's credit guarantee scheme.
The government has already made capital investments in the Royal Bank of Scotland, HBOS and Lloyds TSB, totaling £37 billion ($64.9 billion).
Not all the large U.K. banks are participating in the U.K. government's initiative, but they have all committed to increase their total Tier 1 capital through independent actions.
HSBC Holdings, for example, further strengthened the capital base of its U.K. subsidiary, HSBC Bank, through an equity injection of £750 million. This capital injection satisfied the U.K. government's capital base target for HSBC and was funded from the HSBC Group's own resources.
On Oct. 13, Barclays announced that it is also raising new equity without the assistance of the U.K. government. Barclays outlined a plan to raise £3 billion of preference shares prior to year end 2008, and plans to follow-up with issuance of £3 billion in ordinary shares. The follow-up is scheduled for issuance after year end 2008 results are released. Barclays has also eliminated its final 2008 dividend, of £2 billion.
Nationwide Building Society also announced its intention to increase its capital base by £500 million through normal market channels between now and its financial year end.
This move toward recapitalization and improvement of the liquidity support provided to U.K. banks means that any seller or counterparty-related risks to securitization will be effectively calmed. Deutsche Bank analysts said that even though bank ABS/RMBS programs have been excluded from the scope of the government guarantee, securitized bonds are still expected to trade tighter because of the bailout.
However, an explicit guarantee of vanilla bank debt will put securitizations at a distinct economic disadvantage, and provide no incentive for banks to come to the structured finance market while such guarantees remain in place, analysts said.
"We expect ABS spreads to tighten somewhat, better reflecting [their] revalued benchmark and sharply reduced seller-related risks in bank securitizations," the analysts wrote. "But as long as governments continue to directly backstop bank debt, there can be no restoring the historical financial-ABS credit spread relationship."
The new measures will also do little to alleviate the cost of mortgage refinancing or ease the availability of credit for borrowers that fall under self-certified, sub- or near-prime, high LTV categories. Mortgages to such borrowers proliferated in the pre-crisis period, and those volumes won't be regained under the government's plan because the plan doesn't restore the price of mortgage credit to these segments of the borrowing population.
The government plan does, however, appeal to the lender's risk appetite to underwrite certain mortgages beyond the most standard, prime mortgage product. As such, Deutsche Bank analysts said they still expect to see payment shocks, as borrower roll-off teaser mortgage rates will continue to drive arrears and defaults.
The bank debt guarantees do provide an outlet for securitization issuers to refinance any wholesale ABS/RMBS coming due. Although there might not be an immediate need for this because of the current lack of securitized cash flows, the benefit of the ability to refinance securitized debt in the unsecured and government guaranteed market should not be under-emphasized, said Deutsche Bank analysts.
"The government backstopping of liabilities may also be important in allowing banks to refinance or call the £131 billion of retained ABS that has been issued by banks for liquidity purposes," Deutsche Bank analysts said.
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