U.K. mortgage lender Atom Bank is making its first trip to the securitization market.
The £571.6 million transaction, Elvet Mortgages 2018-1, is also the first mortgage bond offering rated by Moody's Investors Service to include loans which were originated using a mobile phone application.
The portfolio consists of 3,186 prime mortgages on owner-occupied residential properties. At closing, 100% pay fixed rates of interest. However after 3.12 years, on average, they will revert to Atom Bank's standard variable rate, currently 3.75%
Moody’s presale report does not address risks associated with mobile lending per se, though it cites Atom’s limited opearting history and the lack of performance data on its lending portfolio as sources of concern. Atom obtained its banking license in June 2015 and started operations in April 2016. It has no branches or physical presence apart from its headquarters in Durham and a satellite office in London, which the rating agency says is in line with many other U.K. “challenger” banks.
The company offers prime residential mortgages to borrowers who are U.K. residents though two distributors that provide a panel of selected intermediary firms (2,703 as of June 2018). It also offers fixed term deposits to retail customers. Underwriting is done in-house through an automated process based on credit score, affordability assessment and policy rules.
In its presale report, Moody's cites as mitigants the fact that Atom's management team is "experienced" and it "leverages technology to automate processes, while outsourcing certain operations to well-known market participants."
Moody's normally use performance data provided by the originator, in addition to other relevant data, to extrapolate expected losses for the loan pool. That not being available, the rating agency looked to "market and sector-wide performance data, the performance of other securitizations and other originators’ data" to obtain an expected loss of 1.8% over the life of the transaction.
That is higher than Moody's expected losses ofr other U.K. prime transactions, mainly because of the originator’s lack of track record, the relatively untested servicing arrangements, the current macroeconomic environment in the U.K., as well as the low weighted-average seasoning of the mortgage loans of 0.33 years.
Two tranches of notes will be issued in the transaction, dubbed Elvet Mortgages 2018-1; Moody’s expects to assign an Aaa rating to the senior tranche, which will account for 89% of the capital stack. There will also be a tranche of subordinate notes that are unrated. Total credit enhancement for the senior notes will be 13%, consisting of 11% subordination and a 2% reserve fund.
