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Shawbrook will tie UK 'buy-to-let' bonds to SONIA benchmark

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Shawbrook Bank Ltd.’s £308 million securitization of UK buy-to-let (BTL) properties is noteworthy as it represents the specialty lender’s first-time issuance of bonds backed by investor-owned properties.

What is also significant is that Shawbrook Mortgage Funding 2019-1 PLC will be pricing those bonds against the fledgling Sterling Overnight Index Average (or SONIA) as a reference rate, instead of the Libor rate that SONIA is favored to displace within three years.

The trust is pooling mostly fixed-rate, interest-only loans to 1,141 borrowers with no adverse credit history, who are serving as landlords for properties in England, Wales and Scotland that are being rented out to tenants.

Moody’s Investor Service believes the pool has strong collateral with interest coverage ratios and loan-to-value ratios that are in line, or an improvement on, peer issues in the UK RMBS space. But the loans are seasoned only one year and a “large portion” of the loans are to companies with cross-collateralized portfolios of multiple properties financed by a single loan. That arrangement elevates the borrower concentration beyond that of peer buy-to-let RMBS issuers.

Most of the loans (81.5% of the pool’s collateral value) are fixed-rate accounts, but have an average five-year reset period that will convert the loans to floating-rate. With a weighted average remaining term of 12 years, the loans would not likely have a sterling-denominated Libor rate to reference when the conversion takes place, since the benchmark is likely to disappear after 2021 when the British Financial Conduct Authority (FCA) will no longer require panel banks to contribute daily quotes on estimated interbank borrowing rates.

The capital stack includes three classes of notes rated by Moody's: a Class A tranche with a preliminary AAA rating that will total 84.5% of the final pool asset level; a Class B tranche rated Aa1; and a Class C offering rated A2.

The notes' coupon is to be determined, but will be paid on a quarterly basis, based on the compounded calculation of the daily SONIA rate for the payment period, according to Moody's.

SONIA is a weighted average rate of overnight sterling-denominated indexed swap transactions administered by the Bank of England (BoE). The rate has been promoted as a new interest rate benchmark for loans and bonds in the UK by a BoE working group, and has a growing volume of securities, bonds and loans indexed to the rate. BoE estimates the SONIA benchmark values around £30 trillion of assets each year.

While the underlying loans are still repaid on Libor rates, the floating-rate mismatch with the SONIA rates is being mitigated by a swap arrangement provided by BNP Paribas, according to Moody’s.

Shawbrook’s deal was arranged by Lloyd Bank Corporate Markets plc, which also served as joint lead manager with ABN Amro and National Australia Bank Ltd.

Moody’s has an expected loss of 2.5% on the transaction, which is at the “higher end of the BTL spectrum,” the agency noted.

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RMBS Europe