Kensington Mortgage Co. plans to issue a bonds backed by a portfolio of recently acquired GE Money originated U.K. mortgages, according to Moody's Investors Service.
The transaction called Trinity Square 2015-1 will issue £1 billion ($1.5 billion) of securities backed by mortgages that were mostly originated in 2008 and before.
GE Capital, the parent company of GE Money, sold a £3.6 billion portfolio of UK mortgages to private equity owned Kensington Mortgage in November. Blackstone Tactical Opportunities and TPG Special Situation Partners control Kensington Mortgage.
The majority of the notes on offer will be rated 'Aaa'; the class A notes which represent 83% of the bond offering benefit from 17% credit support and the class M notes benefit from 14.50% credit support. The notes are due July 2051.
Along with credit enhancement the notes will also benefit from the support of a reserve fund that will be equal to 3.0% of the initial mortgage pool balance.
Kensington Mortgage will service the loans. Citibank and Bank of America Merrill Lynch are the lead managers.
Most of the loans (94.2%) in the portfolio are interest linked to the Barclays Bank Base Rate (BBBR), which is in turn linked to the Bank of England Base Rate. Another 4.7% of the loans in the pool pay standard variable rate (SVR) plus a margin.
There is no hedge in the structure to mitigate the risk of an interest rate mismatch between what the bond pays and what the mortgage pays. The standard variable rate mortgages could be at risk of reduced spreads if Libor rate (which is what the bond is linked to) increases faster than SVR.
Similarly, there is a risk that the spread in the transaction will decline as a result of an increasing mismatch between BBBR and Libor. Moody’s applied a 50 basis points stress on the yield margin on BBBR linked loans to account for the risk posed by the mismatch. To account for the risk of reduction in SVR, Moody’s stressed the yield on SVR loans to the level of Libor + 1.0% plus the relevant margin over the base SVR. This level is consistent with historically observed SVR levels in the market. The current level of the sellers’ base SVR is over 3% above Libor
The weighted average seasoning of pool is 8.2 years and 76.6% of the loans have never been delinquent.
