More U.K. Funding for Lending is Less Placed Securitization
The Bank of England’s expansion of its Funding for Lending Scheme by one year to January 2015 means U.K. investor placed issues will likely continue to see little action, said market analyst.
During the extension period, lenders will be able to borrow £10 under the scheme for every £1 of net lending to SMEs in Q2-Q4 2013, and £5 for every £1 of net SME lending in 2014, according to Standard & Poor’s. Lenders will also be able to access FLS funding against net lending to financial leasing corporations and factoring companies.
The Bank of England launched its Funding for Lending Scheme (FLS) mid-2012. It allows banks and building societies in the U.K. to use certain pools of loans as collateral against borrowing Treasurys from the BoE with a maturity of up to four years. Originators can borrow up to 5% of their loan book, plus any next expansion of lending. It was originally set to terminate in Feb 2014.
Analysts at Barclays said in a securitization report today that amendments to the extension will now require that the type of lending – for instance SME loans, large corporate loans or U.K. resident household loans-- be disclosed by banks,.
The Bank of England is also looking to incentivize SME lending, said Barclays. The portion of SME net lending will count for a far greater multiple for funding than other forms of lending: SME net lending in 2013 will be counted as 10x and SME net lending in 2014 will be counted as 5x.
The scheme will also now include lending made by participating non-bank lenders. Non-bank lenders are defined as financial leasing corporations, factoring corporations and mortgage and housing credit corporations (excluding SPVs related to securitization).
Under the scheme funding rates are lower in most cases than the real market can offer. Barclays said it revised its issuance expectation for U.K. RMBS based on the new and now expects the market will significantly undershoot its start of year forecast of £12.5 billion.
“The extension of the FLS scheme, while expected, will add to the lack of supply, for longer, for RMBS investors,” said the Barclays analysts. “Other forms of U.K. ABS issuance (as well as wider bank funding options, eg, covered bonds and bank securities) may also suffer as lenders are able to receive a larger multiple of funding for lending to SMEs, which will therefore assist them in their overall funding profile.”
This lack of supply should support a tightening of UK prime spreads, as investors look for possible investments. “This in itself may make RMBS a more attractive option in the future, and allow it to become economical compared to the FLS,” said Barclays.