Abbey National has made it clear that its two securitization vehicles - Holmes Financing and Marylebone Road - represent a regular program of issuance and that they plan to tap the market again in the future.

The U.K. mortgage bank has always been streets ahead of the competition when it comes to asset-backed issuance, but this year has seen the bank push its total issuance to GBP11.1 billion - 16% of its total mortgage book. And there are no signs of a slackening in pace.

In terms of its share of the U.K. RMBS market, that rate is quite staggering - 33% of a market that itself represents 57% of the entire RMBS market in Europe for the first half of 2001.

Abbey National's debut issue was the GBP250 million ILSE deal in February 1998. Building from that, the Holmes Funding issues in February 1999 (No. 1) and November 1999 (No. 2) introduced euro notes and the concept of the substitution of assets to the program. But issuance really took off following the introduction of a master trust structure to the Holmes program with the four Holmes Financing issues.

Holmes Financing No. 1 amounted to GBP2.25 billion and was launched in July 2000; Holmes Financing No. 2 (GBP2.4 billion in size) followed swiftly in November 2000; Holmes Financing No. 3 (GBP2.2 billion) came in May 2001; and the GBP2.7 billion Holmes Financing No. 4 was launched in July.

This year has also seen the launch of a synthetic arbitrage CDO program known as Marylebone Road. The first such issue was launched on December 29 last year and was $500 million in size. Marylebone Road CBO 2 was launched in April this year and was three times the size at $1.5 billion.

Abbey full?

If the bank plans to continue this pace of issuance it raises the obvious question: will the market become exhausted with the Abbey name? Presumably there is only so much Abbey paper that investors can digest. Chris Fielding, head of treasury advisory services at Abbey National Treasury Services (ANTS) in London, believes that the market is growing fast enough to cope with this volume of issuance.

"When ILSE was launched three years ago securitization seemed, for many people, a surprising thing for the double-A-rated Abbey National to do," he says. "We could now see securitization assuming an increasingly important role over time. I think that the market is very comfortable with what we are doing."

Fielding emphasizes that growth in issuance has to fit with the Abbey National's business requirements and investors' appetite for the RMBS market, showing clear benefits to shareholders, customers and investors. "Securitization has done that to date [for Abbey National]," Fielding says. "Three years ago detractors said that it would fail on all of those counts."

The concept of the master trust structure that has been applied so successfully in the Holmes Financing program was developed in conjunction with Citibank, which lead managed all the Holmes issues. David Basra, director at Citigroup Securitization, explains that the phenomenal growth in the European RMBS market and the demand for this type of paper should allow Abbey National to continue with its planned levels of issuance.

"In 1997 this market was very small. However, last year saw issuance of around $35 billion. Citigroup predictions for 2001 are about $50 billion. There is no reason to believe that in 10 years the European mortgage market could not rival the size of the U.S. mortgage market," Basra predicts. As for Abbey National, he insists that there should always be capacity for the name: "Abbey National is a benchmark issuer."

But if Abbey plans to continue issuance at its current pace, at what percentage of its mortgage book will it have to stop? "Technically, you can securitize 100% of your mortgage book, as we know from both the U.S. experience and the funding methods of certain U.K. mortgage lenders" Fielding says.

He emphasized the differences between both those examples and the Abbey National's own position. "There is a prevalence of long-term, fixed-rate lending in the United States (which provides both a predictable interest cash flows on the assets and predictable customer response to changes in interest rates) as opposed to the complex product and floating rate model common in the United Kingdom (with less predictable outcomes)" Fielding says. He continues: "The Abbey National is a double-A-rated credit with a strong wholesale funding franchise and our motivations for securitization are different from those of some other U.K. RMBS originators."

While Fielding is not suggesting that Abbey National plans to securitize its whole mortgage book, or even rapidly increase the proportion securitized, he emphasizes the fact that it is not constrained at the current volume of issuance or size of the master trust.

New investors

There is no doubt that the master trust structure of the Holmes Financing program has opened up the RMBS sector to new investors because of the innovative soft bullet' structure. This has enabled investors who ordinarily would not have been able to look at mortgage paper because of its maturity to buy into the asset class. "We have seen first time buyers of ABS come into the market because of Holmes," says Fielding at ANTS. "It is also often referred to as the benchmark in the secondary market."

Basra claims that the collateral quality of the Holmes deals gives investors comfort and should ensure continued appetite for Abbey National's master trust. Furthermore, the originator is sharing in the same pool of risk which should provide greater reassurance" he says. "This stuff is highly structured to protect investors."

The key to Holmes' success has been its ability to mitigate prepayment risk.

This is a particular feature of the U.K. market when compared to the U.S. market. "Prepayments in the Holmes transactions are now running at around 30%," says Rob Collins, manager, treasury advisory services at ANTS. He explains that an important distinction needs to be made between underlying true prepayments (around 17% at this time) and technical prepayments (which run presently at around 13%), where the customers are remaining with Abbey National but may be borrowing additional funds or changing to another Abbey National mortgage product.

The rate of churn in the U.K. market is currently high but as Collins says: "We believe we will see a decrease in the rate of churn; lenders are trying to achieve this by making further and sophisticated efforts to maintain customer loyalty."

Fielding adds: "U.S. and European investors do not want U.K. prepayment risk and we therefore developed different types of notes that can remove it." He does, however, note that while high prepayment is bad news in traditional pass-through amortising structures, the soft-bullet certainty in Holmes means that prepayment is actually good news. "The structure needs a certain level, below historic precedent, of prepayment in order to meet its cash flow requirements. We have taken the negative factor of prepayments and turned it to our advantage with soft bullets."

To discourage serial rate-hoppers, competitive rates are not offered to re-mortgagees. The situation is very different from the mortgage market in the United States, where complete repayment of the mortgage is expected and the (relatively low) risk of prepayment is left with the noteholders.

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