Friday, July 4, 2008

Covered bonds at Barcap

(FT Alphaville) A report earlier this week highlighted a somewhat surprising development in the ABS market: issuance up 158% in Q2 this year against Q1.

Now admittedly, we’re working up from the bottom here, so percentages need not indicate such a stunning a recovery in absolute terms. And even if there was - or has been - real terms, a genuine increase in securitisation, it need not actually mean the wheels of the structured finance market are again turning.

[Anecdotally] Consider…

£11.5bn Arkle 2008-1
£9bn Permanent Master Issuer

And… more than £20bn securitised this week (and last month) by RBS.

That alone is around $80bn of MBS all of which have been created - zombie style - for use in the BoE SLS. Hardly healthy stuff.

But it turns out there is more to the UK ABS market than zombie bonds.

Barcap has just issued the inaugural tranches (2 - worth £2bn, backed by £3.58bn collateral) of a new £15bn covered bond programme.

Fitch and S&P have rated the series triple-A. From Fitch:

Fitch Ratings has today assigned Barclays Bank Plc’s (Barclays - ‘AA’/Outlook Stable/’F1+’) first two benchmark mortgage covered bond issues of GBP1bn each, with a maturity of three and three and a half years, ‘AAA’ ratings. The ratings are based on Barclays’ Long-term Issuer Default Rating (IDR) of ‘AA’ and a Discontinuity Factor (D-Factor) of 10.8%, the combination of which enables the mortgage covered bonds to reach a ‘AAA’ rating.

The ratings also take into account committed over-collateralisation (OC) between the cover assets and the covered bonds being sufficient to sustain ‘AAA’ stress scenarios applied by the agency.

The collateral consists of first-charge, residential mortgage loans originated in England, Wales, Northern Ireland and Scotland by Barclays. As at 29 February 2008, the pool consisted of 29,012 loans totalling GBP3.58bn, with an average original loan-to-value ratio (LTV), based on the original loan balance and property value, of 55.54%. In a ‘AAA’ scenario, Fitch has calculated a cumulative weighted average frequency of foreclosure (WAFF) for the cover assets of 13.51% and a weighted average recovery rate (WARR) of 81.02%. The cover pool has reasonable geographical diversification, with the highest concentration in London, outer Metro and south-east UK (52.05%) and the remainder well spread across other UK areas.

The nominal OC stands at 78.95%. The covered bonds benefit from a minimum level of 6.38% OC through the asset coverage test, whereby outstanding covered bonds cannot exceed 94% of the total cover pool.

As we’ve noted in the past, covered bonds could well be a sure way of getting nervous buyers back to the mortgage securitisation market. With a hefty 22% haircut on those zombie RMBS used in the SLS, surely a real market is the preferable option.

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