* Credit rally pulls UK and Dutch RMBS back into line
* Bank of England lending scheme no longer setting market tone
By Owen Sanderson
LONDON, Jan 25 (IFR) - The Bank of England-inspired tightening of UK RMBS last year has been overtaken by the broad credit euphoria across Europe this year. Rabobank subsidiary Obvion demonstrated this with Dutch RMBS Storm 2013-I’s Class A1 print on Tuesday, the tightest in any RMBS since the crisis.
The 45bp level (against 47bp for the last UK deal) means the market priced virtually no difference between UK and Dutch paper, despite UK supply being expected to be minimal for at least the next year, while Dutch RMBS will probably be the bulk of the market.
For longer dated tranches, there is still a spread between the jurisdictions, reflecting the different traditions in the two markets.
Dutch deals usually come with a 2-year and a 5-year tranche, and the cashflows from the portfolio usually switch to the longer tranche only after the short tranche is paid. That means investors depend on the step-up and call at to get their money back in time, and therefore price in the credit quality of the originating bank.
Long UK tranches, by contrast, tend to be issued from master trusts, which collect cashflows from vast pools of mortgages, allowing payments on the bonds to be scheduled, or maturity to be “soft bullet” at the end of the tenor. Investors still depend on the issuing bank to maintain the master trust, but in cases where this does not work - the old Northern Rock trust Granite for example - senior investors still see rapid paydown of the bonds.
Once the Bank of England announced the Funding for Lending Scheme (FLS) last July, offering UK banks super-cheap borrowing against real economy assets, prospects for issuance from the UK RMBS market - the mainstay of the market - took a dive.
Bond spreads screamed tighter, tightening around 100bp from July to September, and reversing existing market norms. For most of the post-crisis period, UK RMBS was 20bp-30bp wider than Dutch, but the Bank of England’s action flipped the basis around completely.
Draghi’s commitment to “do whatever it takes” gave investors the confidence to bid Dutch paper tighter - Storm paper rallied around 20bp - but a wider spread had still opened versus the UK, which has only now closed for short-dated deals.
Now that short Dutch paper has printed on top of UK RMBS, German multifamily could be the next asset to come in, according to Deutsche Bank.
“The basis between German multifamily, UK prime and Dutch prime is one which we continue to be unable to comprehend,” said a note from Deutsche’s research team.
“To the extent each product reflects a systemic country exposure taken via a residential housing debt product, in our opinion German multifamily should trade much closer to Dutch and UK RMBS.”
Storm 2013-I, the first public issue of the year in the European structured finance market, was the deal to close the gap.
Leads Rabobank International and Societe Generale announced that the deal had no preplacement and would not be increased in size - a complete reversal in strategy from Storm 2012-IV, which featured some EUR800m of preplacement in a EUR2bn deal, and was sold cheap to the market, tightening nearly 20bp following pricing.
Max Bronzwaer, treasurer at Obvion, said the collateral was not available for a larger deal this time.
“We did a hefty EUR6.5bn of funding last year, and simply did not have a larger portfolio to offer. There will be calls of outstanding Storm deals in April and May. We chose not to preplace any bonds because this would not really leave enough of the tranches to be liquid instruments.”
The marketing process saw leads float price thoughts at 50-55bp and 95bp area, and use the momentum to bring price in, first to guidance of 45-50bp and 90bp area, and then to 45bp and 85-90bp, with tranches 3.5 times and 3.1 times covered. Both priced at the tight end.
“Initial price thoughts were fairly conservative - you never quite know how a market is until you launch a deal - but the response was overwhelming, and we quickly tightened,” Bronzwaer said. “What I’ve heard of the secondary market since suggests the new deal has repriced outstanding Storm tighter.”
Storm functions as a market benchmark in Dutch RMBS, as it is the most frequent issuer, and typically the tightest name. Less regular issuers price at Storm plus a spread.
This was effectively demonstrated by NIBC Bank’s Dutch MBS XVIII. Leads Credit Suisse and Morgan Stanley started testing investor interest on Wednesday morning, following Storm’s pricing on Tuesday afternoon. These were at 45-50bp on the A1 and 100bp area on the A2 - which had turned to a final price of 45bp and 95bp on Thursday afternoon.
NIBC Bank is seen as a much weaker originator than Rabobank subsidiary Obvion, which should show up in the A2 tranche, but leads started just 5bp back from Storm IPTs, pricing only 10bp outside Storm - this level can only have been set by the 85bp Storm coupon.
The A1 notes of Storm three times covered at pricing and allocated 37% to the UK, France 32%, offshore 13%, the Netherlands 11% and other 7%. By type it was banks 59%, fund managers 27% and other 14%.
The A2 notes were 2.3 times covered, allocated to the UK 39%, France 17%, the Netherlands 16%, Germany 15%, other 4%, Belgium, 3%, offshore 3%, and Switzerland 1%. By type it was 60% banks, 38% fund managers, and 2% other.
Reporting By Owen Sanderson