Just as the curtains close on 2001, the European market is welcoming another first with the debut of Portugal's new MBS, Magellan Mortgages No. 1 Plc, issued by Banco Comercial Portugues.

The EURO1 billion transaction is the first Portuguese securitization involving the sale and assignment of loan receivables backed by mortgage rights on residential properties located in Portugal. "What the new law did is create an on-shore structure; prior to this there really wasn't a structure to transfer assets domestically in a tax-neutral manner," explained Mark Lewis, head of MBS at ABN AMRO. "The ultimate change came in August when they finally addressed the tax withholding issue. Before that it was possible to do the deal but it just was not efficient." Lewis added that this "new" securitization law has been around for two years.

According to ABN AMRO, lead manager on the deal, the transaction will involve the sale of EURO1 billion of residential mortgages to a newly established securitization fund, Fundo Servimedia, which is based in Portugal. The fund will issue units to the special purpose company, Magellan Mortgages, which will in turn fund their purchase through the issue of the notes to international investors. It is the first and currently the only fund-management company available in Portugal.

"It's likely that others will seek to use this structure - it works and it's efficient," said ABN AMRO's Lewis. "People like to use something with history and the fact is that this institution was given approval by the Portuguese securities commission and the Bank of Portugal." (see ASR 7/30/01)

The notes have currently earned a prospective triple-A rating for the EURO943 million class A notes; double-A rating for the EURO37 million class B notes; and a triple-B rating for the EURO20.5 million class C notes. "Structurally it's the cleanest legal opinion we have ever read," said one analyst at Moody's Investors Service. "You get the impression that people have been thinking about this deal before the rating agency was tapped in; they had taken many structures before the Bank of Portugal prior to finding one that worked for everyone."

A successful pricing

To be sure, if the proof is in the pricing then the story is that investors were eager to get in on the new asset class. "We were quite astonished. Being so late in the year we would have thought investors had closed the books, but the deal was two times oversubscribed on the class A notes," said Lewis. The class B notes received similar attention and were three times oversubscribed, an eagerness that was greatly depicted in pricing. Original price talk put the Class A notes at 28 to 29 basis points and the class B notes at 65 basis points; the notes priced at 27 and 58 basis points respectively, and the C notes priced at 130 basis points.

Lewis attributed the reception to the fact that the year had been extended a little longer than usual and MBS and ABS structures are conservative instruments that appeal to credit-wary investors. "In terms of what the deal had to offer, the market has seen a lot of MBS structures emerging from the U.K., Netherlands and Italy - people are a bit jaded," he said. "They see this as a very high quality transaction and it allows for diversification. Portugal is a relatively small market so you won't see high volumes."

In recent years Portuguese residential mortgage lending has increased due to lower interest rates and more competitors providing financing and a favorable economic environment, reports Moody's. "The total mortgage market is approximately EURO50 billion and rising," said one analyst. "All of the major banks will seek to use securitization as a tool. Over the years portfolios have grown by 20% and this tool will not only offer capital efficiency but also it will also offer funding diversification.

"In the next year we can expect to see EURO3 billion to EURO4 billion of issuance."

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