Thursday, September 24, 2009

Asset-backed revival could follow Lloyds, VW deals

Posted on Reuters:

Germany's Volkswagen (VOWG.DE) and UK bank Lloyds (LLOY.L) on Wednesday tested investor appetite for asset-backed bonds with two deals that could resuscitate European securitisation markets shut for more than a year because of the credit crisis.

A strong response could encourage more securitisations that could help ease the flow of money into the wider economy.

Since the start of this year, most areas of the financial markets have gradually reopened, allowing companies to raise financing via the credit and equity markets.

But markets for asset-backed or securitised products - used before the crisis by banks to expand lending - have remained shut until now.

Securitisation was singled out as one of the causes of the credit crisis, where bonds backed by U.S. sub-prime mortgages helped to cripple the global financial system.

It is also seen as part of the solution.

The International Monetary Fund said this week reviving complex securitisation markets would be critical to recovery from the crisis. [ID:nN2128269]

The Lloyds (LLOY.L) deal, which is backed by residential mortgages from UK mortgage lender HBOS, is viewed as a positive sign in terms of investor sentiment towards the UK housing market and also towards these complex financial products.

"It is really positive news that investors want exposure to the UK housing market," said James Zanesi, structured credit analyst at Unicredit.

"The spreads are really tight considering the life of the notes (bonds)," he said, referring to the initial pricing details and the term of the issue which is five years.


Initial details of the price levels where the asset-backed bonds from Lloyds and VW are being offered to investors were mostly in line with market expectations.

Guidance on the sterling-denominated part of the Lloyds' mortgage-backed issue was set at 3-month Libor plus 180 to 185 basis points. Guidance on the euro-denominated issue was at 3-month Euribor plus 170-175 basis points.

At the start of the year, spreads on similar mortgage-backed bonds were as much as 500 basis points over Libor, according to investors.

The final size of the Lloyds' issue is yet to be determined, depending on the level of investor demand.

The Lloyds deal does not have any government backing, but includes an option for Lloyds to buy the securities when they mature.

Allen Twyning, credit analyst at Aviva Investors, said it was a compelling deal because extension risk due to slow repayment of mortgages was removed by the Lloyds "put" option.

The VW deal, backed by car leases, has initial guidance on pricing of 1-month Euribor plus around 115 basis points on one tranche and 1-month Euribor plus 250-300 basis points.

The deal is in two parts, one of 457.5 million euros ($676 million) and one of 17.5 million euros.

The VW issue, announced on Sept. 7, was seen as a logical step to reopen the asset-backed market because car leases are short-term and standardised.

But the Lloyds securitisation of home loans could be the real gauge of whether investors' have regained their taste for structured products.

"Both asset classes (HBOS mortgages and VW leases) are squeaky clean," said one credit investor, who pointed to banks, insurance companies, institutional investors and money market funds as potential buyers.

"It's a useful searching excercise to discover who's interested," the investor said. "It feels hopeful."

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