It is unlikely that the U.K. Government will extend its Asset-Backed Securities Guarantee Scheme, primarily as structured finance issuers have not used the scheme to date, said Fitch Ratings.
The U.K. government guarantee scheme launched in April 2009 was put in place for six months and is due to expire tomorrow. The government, however, has kept its options open on a possible extension of the scheme.
It was designed to reopen the U.K. RMBS market and offered structured finance issuers government guarantees covering credit or extension risks at a fixed cost at approximately 25bp over LIBOR, plus the median five year credit default swap (CDS) rate for the originator.
However, there has been no issuance under the scheme, primarily because CDS swaps for banks have widened significantly since the start of the banking crisis, making the scheme's economics unworkable for most originators.
Instead, Fitch expects market-based solutions to reopen and stimulate the RMBS market. Such solutions could include structures offering investors explicit, albeit non-guaranteed recourse to the originator - such as seen on the recent issuance out of the Permanent master trust program.
"A market-led solution appears to be emerging following the compression of RMBS spreads in recent months,” said Gregg Kohansky, head of EMEA RMBS at Fitch. “Recent publicly-targeted U.K. RMBS transactions have included a backstop date as to when debt will be repaid. This structural feature appears to be an important consideration for investors, who are concerned about extension risk in the current environment."
