One of the U.K.'s biggest banks and most enthusiastic securitizers, Abbey National, recently launched the biggest-ever European mortgage-backed securitization. Called Holmes Financing No.1, the GBP2.2 billion ($3.3 billion) global transaction is backed by first-tier residential mortgages. Schroder Salomon Smith Barney has been brought in to arrange the deal and will act as lead manager and global coordinator, along with 11 other syndicate members.

The deal uses a revolving master trust structure, something which enables multiple transactions to be issued from the same vehicle. The use of the technique, which was originally developed for U.S. credit card deals, was first used for a European mortgage securitization when Salomon arranged the Mound Financing MBS deal for the Bank of Scotland in April.

Over 128,000 mortgages for homes in England and Wales - worth almost GBP6.2 billion and with an average loan-to-value ratio of 80.9% - were put into the pot, allowing not just this issue, but another GBP4 billion of issuance in the future.

The deal had not priced by presstime, but Abbey officials confirmed that it was targeting an all-in cost of around 25 basis points over Libor. As always for a bank like Abbey, securitization is not its cheapest way of raising funds, but it offers more subtle benefits. "Securitization is an important part of our balance sheet management strategy," said Mark Pain, the company's group finance director. "It increases our return on capital and provides a further source of long-term funding."

Credit enhancement for the class A notes is provided by subordination on the B notes (3.5%) and C notes (4.5%), as well as a GBP6 million reserve account which will grow to GBP30 million from any available excess spread.

In order to tap into as wide an investor base as possible, the deal has been split into four series of 13 tranches, including dollar, sterling and euro denominated notes. The Abbey was particularly keen to target U.S. investors - over half the deal ($1.9 billion) is in dollar notes - as a way to diversify its investor base away from Europe, and Salomon has structured in notes with three-, five- and seven-year soft-bullet maturities to attract clients in the U.S.

Series 1 and 2 are both split into three tranches, series 1 having a three-year soft bullet, while series 2 has a five-year maturity. The class A notes were rated Aaa by Moody's Investors Service and AAA by both Fitch and Standard & Poor's. The B notes were rated Aa3 and AA and the C notes Baa2 and BBB. All the notes in those series will pay interest over three-month U.S. dollar Libor.

Series 3 includes a GBP300 million A1 tranche, again rated Aaa and AAA, which will pay interest over sterling Libor and triple A rated E320 million A2 notes. The subordinate B and C tranches in the series also have the same ratings as their counterparts in the first two series.

A syndicate official at Salomon said that it was essential that a deal of this size be taken outside of Europe and into the U.S. "Think about it for a minute: this deal is worth GBP2.2 billion," he said. "I think when you do that kind of size of transaction, it moves you to go to as many investors as possible to sell the transaction."

Similarly, the flexibility that the master trust structure offers allows for tailoring tranches to meet specific requirements. "The importance of this deal is that you have a mortgage-backed deal which uses soft bullets in its structure with short legal finals," he said. "The big issue in Europe is that you had a lot of pension funds and institutions that could not buy mortgage products in the past because of the long legal finals. Effectively what we tried to do with this deal was appeal to the widest audience possible."

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