Peripheral European Issuers Ready to Dive Back In to RMBS

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Since the financial crisis, the European market for residential mortgage backed securities has been dominated by U.K. and Dutch deals.

Two recent transactions, one Irish and one Spanish, suggest there may be sufficient appetite for deals from peripheral markets as well. Although they were priced wide of U.K. and Dutch deals, their sponsors found the funding attractive 

On May 27, Union de Creditos Inmobiliarios (UCI) priced the first investor-placed Spanish residential mortgage securitization since July 2007. Prado 1 issued two tranches: a €342 million ($372 million) tranche of four-year notes, rated ‘AA’ by Standard & Poor’s, pays 85 basis points over three-month Euribor. It benefits from 27% credit enhancement provided by a €108 million ($117.7 million) junior tranche.

The deal priced only 5 basis points over an Irish RMBS, Dilosk I, the same week, which is for a Spanish RMBS a very tight level.

One source familiar with the transaction said the issuer found this level attractive and is likely to return to market.

“The ABS purchase program by the European Central Bank has had its effects - ABS deals, at least senior tranches are priced much tighter than before the program started,” said the sell-side source. “You can see from the stats that the deal had Central Bank involvement, which gave the market a very strong signal.”

The European Central Bank purchased just over €63 billion ($68.75 billion) in public and private debt securities last month under its three-month-old quantitative easing program, according to data published June 1.

There is also the fact that as non-bank lender, UCI’s funding options are limited.

UCI was a regular issuer before the financial crisis. It placed more than €12 billion of RMBS from its previous program between 1994 and 2007.  

However, the pre-crisis transactions were backed by pools of loans with riskier characteristics, such as high loan-to-value ratios, and they underperformed other portfolios. By comparison, Prado I is backed by 3,761 mortgages with low original LTVs of 57.14%. All of the loans were originated after the 2008/2009 financial crisis; they have a weighted average seasoning of 54.16 months.

Fewer than 16% of the mortgages were originated as bridge loans to individuals looking to purchase a new home before selling their old one. And all of the bridge loans have now been converted to standard, amortizing loans. By comparison, previous UCI transactions included bridge loans that had not yet been converted to standard, amortizing loans.

“We believe that the profiles of the loans in this transaction are stronger than those of standard residential mortgage-backed securities borrowers, due to the seasoning, the lower loan-to-value ratios, and the fact that they have never been in arrears despite the years of origination,” S&P stated in its presale report on the deal.

The report notes that the credit enhancement for the class A notes is sufficient to mitigate their exposure to credit and cash flow risks at the 'AAA' rating level. However S&P caps the rating single-jurisdiction securitizations at four notches above the sovereign foreign currency rating, which for Spain is ‘BBB.’

Dilosk RMBS No. 1, the second post-crisis Irish RMBS and the first to earn a triple-A rating. The sponsor, Dilosk Limited, pays 80 basis points over there-month Euribor on the €196 million tranche of four-year notes, rated triple-A by DBRS and S&P. The notes benefit from credit support of 22.5%.

In a telephone interview, Dilosk CEO Fergal McGrath said that this pricing seems “fair” for an inaugural issue from a non-bank.

“The deal was over subscribed and it’s trading at par now in the secondary market, said McGrath. “I think the pricing was fair and we were happy with the result”.  

Dilosk I securitized 1,939 loans with a weighted-average seasoning of 5.4 years, with 59% of the portfolio originated from 2010 onwards. The weighted-average LTV of the portfolio is 49.61%.

The mortgages were acquired from the Bank of Ireland last September at the same time the issuer acquired the ICS brand and distribution platform. ICS is one of the leading players in the Irish mortgage market and has been in business for 150 years.

The offering is part of the Dilosk’s “long-term growth plan targeting new lending with a particular focus on the Irish residential investment (or buy-to-let) property market," according the issuer's website.

Lending is expected to commence in the third quarter of 2015 through the ICS Building Society lending platform, which Dilosk acquired in September 2014, according to a DBRS presale report.  Borrowers will be sourced via a nationwide network of brokers and origination will be provided through secured warehouse facilities and eventual securitization.

McGrath said that in the meantime the issuer plans to also aggregate acquisitions of performing mortgages made in the secondary market, and eventually securitize these loans via the Dilosk program. “Securitization is our main funding model, we originate to securitize,” he said.

While UCI and Dilosk find funding in the RMBS market attractive, other issuers, in particular banks that have access to more kinds of funding, the RMBS market is still very expensive compared with the covered bond market. 

Both Dilosk and UCI’s deals priced wide of comparable tranches of recent Dutch and UK RMBS. For example on May 19, a Dutch mortgage originator priced the senior, triple-A rated, 4.6-year tranche of DRMP1 at 27 basis points over Euribor. And on May 22, U.K. sponsor Virgin Money paid 45 basis points over Libor on the 5-year, triple-A rated notes issued from Gosforth Funding 2015-1.

In a May 29th report, analyst at Barclays questioned how many other lenders in peripheral European markets will issuing RMBS attractive. They noted that the two deals look expensive relative to the cheaper funding available from the European Central Bank’s targeted long-term refinancing (TLTRO) operations,

“In our view, at 80-90 basis points, peripheral European banks will not be willing to issue substantial amounts of ABS considering how much cheaper TLTRO or covered bonds are as a funding source,” the report stated. “We think the breakeven spread levels at which second- or third-tier peripheral banks could favor the sale of ABS over TLTRO are 35-50 basis points.”

Pricing isn’t the only reason that lenders choose securitization over another form of funding, however. “Product diversity and targeting a different investor base plays a role too,” said the sell-side source.

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