The U.K. government last week made a number of announcements regarding initiatives intended to support lending.
In conjunction with the steps already taken by the U.K. government in coordination with its international partners, the scheme is designed to restore confidence to financial markets, supporting financial stability and the availability of credit to worthy borrowers.
The government will be pushing through with discussions with its international partners in the coming weeks, regarding the establishment and coordination of such schemes by a number of countries.
The wide-ranging package includes a number of specific initiatives to help increase lending.
These include the extension of the Credit Guarantee Scheme, the establishment of a guarantee scheme for triple-A-rated ABS, and the extension of the maturity date of the Bank of England's (BoE) Discount Window Facility, a new BoE program for purchasing high-quality assets, a capital and asset protection scheme for banks and clarification of the U.K. regulatory approach to capital requirements.
The scheme is slated to come into play in April 2009, subject to state aid approval. Thereafter, the government will work closely with the industry and keep the scope of the scheme under review.
While the drawdown period with respect to the Special Liquidity Scheme (SLS) will end at the end of January as intended, the SLS will continue to operate for three years from Jan. 30. Previous communications suggested the scheme would terminate on October 21, 2011 - three years after the original date on which the drawdown period was to end.
The Discount Window Facility will be amended, which will give the option of an alternative term of 364 days. This is in addition to the usual 30-day term for such operations. Access to the extended 364-day operations will be subject to payment of an additional 25-basis-point fee.
A new asset purchase facility in an initial amount of £50 billion ($70 billion) will be introduced to take effect on Feb. 2. Under the facility, the Bank of England will be authorized to purchase "high-quality private sector assets, including paper issued under the Credit Guarantee Scheme, corporate bonds, commercial paper, syndicated loans and a limited range of asset-backed securities created in viable securitization structures."
The government also intends to create a new guarantee scheme for ABS. The scheme will involve full or partial guarantees to be attached to triple-A rated asset-backed securities, including mortgages and corporate and consumer debt
The announcements also indicated that the government intends to "offer capital and asset protection on those assets most affected by the current economic conditions."
The Treasury, in return for a fee that may be paid via the issuance of capital instruments, will provide participants with protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a "first loss" amount and exclude a residual exposure amount - expected to be in the range of 10%.
Protected assets will remain on the participant's balance sheet and remain under its management, but such assets will be required to be ring-fenced by the participant so that actions in relation to them, including the enforcement and disposal, will be subject to the appropriate Treasury controls.
Market Reaction
Market analysts said that the new BoE asset purchase facility of up to £50 billion ($70 billion) will help monetize a wide range of high quality financial assets.
The Asset Protection Scheme, which provides credit protection to participating institutions for certain assets in excess of a specified first loss position, will help ease concerns as to possible exposure to exceptional future credit losses on certain portfolios.
"We congratulate the UK's leadership in utilizing securitization as an important part of the overall solution to restoring funding to European Union (EU) businesses and consumers," said Rick Watson, managing director of the Securities Industry and Financial Markets Association and European Securitization Forum. "We encourage other EU governments to work together with market participants on the development of similar programs as appropriate."
In general, the securitization guarantee scheme, which draws on the recommendations made by Sir James Crosby in his November report, will significantly expand lenders' ability to access the securitization investor market, which at the moment is still largely shut.
"This week's package of measures to support the financial system and invigorate new lending was an essential and welcome move by the government. The next challenge is to settle the detailed requirements for each measure so that they can be used by as wide a range of market participants as possible, and as soon as possible," said Michael Coogan director of the U.K. Council of Mortgage Lenders.
The scheme is likely to also have an impact on ratings. Standard & Poor's said that while it will not lead to ratings upgrades, the platform does provide positive steps in response to the rapidly deteriorating fundamentals in the market, and should help to underpin counterparty credit ratings.
"This underpinning, in our view, results from both the direct support provided to banks through additional liquidity and downside risk protection, as well as the indirect benefits to the banks of increasing the flow of credit to the real economy and reducing the probability of a yet more severe economic slump," S&P analysts said.
However, S&P said that market confidence in the sector has deteriorated to the extent that it is not clear whether these measures by themselves will bring about a material improvement. As a result, S&P still expects that the full nationalization of some banks will remain on the cards.
Fitch Ratings said that the support scheme has the potential to unlock the U.K.'s structured finance and broader credit markets.
"Significantly, the Treasury has announced that the guarantee scheme for asset-backed securities will not be restricted to mortgage-backed assets," said Stuart Jennings, EMEA structured finance risk officer at Fitch. "Therefore, the guarantee scheme could potentially unlock a wider range of capital markets than is currently the case."
But Jennings, like most European securitization market players, said the success of the schemes will depend on the specifics regarding their implementation, which remain unclear.
Further announcements detailing the schemes are expected from the Treasury in the coming weeks.
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