Strong appetite for the second mortgage-backed security in a month has raised hopes that this key source of funding for banks could be re-opening following its crisis-induced hiatus.
Nationwide Building Society, the UK lender, on Tuesday priced a £3.5bn ($5.7bn), three tranche, residential mortgage-backed security from its Silverstone master trust. Investor demand totalled more than two times the bonds on offer.
The deal came just a month after Lloyds Banking Group issued £4bn in RMBS from its Permanent Financing master trust – the first sale since the market shut in the wake of Lehman Brothers’ collapse. The new issuance was considered a sign that the market is genuinely beginning to re-open.
“These two trades demonstrate that there is a lot of demand and liquidity for the product and they will encourage investors to refocus on the market,” said Keval Shah of Citi’s syndicate desk, which helped to arrange the Nationwide deal.
The transaction was also good news for regulators who view the market as a crucial funding tool for banks as they wrestle with how best to strengthen banks’ funding following the crisis.
Before the market turmoil hit, UK lenders were using master trusts – vast pools of mortgages from which they periodically issue bonds and top up with new mortgages – as an increasingly important source of funding. In 2006, UK banks issued almost £90bn of RMBS, according to Dealogic. Last year, lenders sold just £2.5bn.
“The re-opening of the RMBS market gives treasurers another fundraising tool,” said Miray Muminoglu of the London syndicate team at Barclays Capital, which helped arrange Tuesday’s deal. “We’ve proved now that there are pockets of demand and I think we will see more issues – but I don’t expect to see the market rush back to its pre-crisis size.” Like the Lloyds sale, Nationwide’s transaction carried extra features that indicated ongoing caution, such as the so-called “maturity purchase agreement”, whereby the lender pledged to buy the bonds back on a set date.
Mortgage-backed bonds from master trusts typically carry set end dates but also contain extension risk because they usually allow the issuer to extend the bond under certain circumstances – a risk that has added to investor caution on the sector.
David Wallis, head of funding at Nationwide, said the agreement was a key element of the structure.
“It is a bit like drip feeding the opening of the market so structural enhancements are beneficial. As the market continues to improve, we may well see these features fade over time,” he said.
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