Ocwen UK Ltd., the British non-conforming mortgage lender, launched its fourth securitization at the beginning of January. The transaction, called Originated Mortgage Loans 4, totaled almost E400 million ($401 million) and was split into a E335 million Class A note rated triple-A and a GBP40 million sterling piece rated single-A.
The deal was the company's first Euro-denominated transaction. The senior tranche, with a 2.4-year average life, priced at 55 basis points over Euribor and subordinated piece, with a 4.6-year average life priced at 150 over Libor.
Because the firm wanted to widen its investor base, BNP Paribas was selected as the underwriter, with the instruction to distribute it away from the U.K.
The pricing was inside the last comparable deal - a GBP260 million deal for Platform Home Loans, via Barclays Capital, which priced at Libor plus 65 for the senior 2.33 year tranches in December - but wider than the levels that similar deals launched at over the last couple of years.
Asset backed pros suggested that the non-conforming mortgage market has widened as supply has begun to sate appetite and that was another reason that Ocwen turned to continental Europe and Ireland.
Like many previous non-conforming deals, the transaction also featured class A detachable coupons - or interest only strips - in order to cope with the large volumes of excess spread characteristic of securitizations of high margin non-conforming mortgages. "The weighted average coupon on the loans is almost 11%, while Libor stands at around 6%," said Paribas structurer Matthew Froggatt.
"In fact, there is so much excess spread that you can actually strip out a portion of the excess spread and create detachable coupons (interest only coupons) and still have a good amount of excess spread remaining to support the deal".
In this instance, the deal was structured to strip out 2.5% of the excess spread, allowing the originator to monetize the excess spread, yet leaving between 2.25% to 2.5% to support the credit enhancement of the deal.
"[It] is probably still in excess of where you would have excess spread in a standard deal, however in a sub-prime deal, there are higher loss assumptions to cover," Froggatt added. "This is a comfortable breakaway point between having too much excess money flowing through the deal, accruing over time, and [the option to] monetize the excess spread and place it in a form where it is a tradeable and bookable investment, rated triple-A".
