By Stephen Knight, CEO

The Lloyds HBOS Permanent (Perma) deal marks a turning point in the UK RMBS market.  Don’t believe the commentators that say it isn’t, because many of them were still predicting as recently as last month a freeze in the securitisation market until 2011. 

The Perma deal was 2x over-subscribed, and upsized as a result, with secondary pricing settling lower than the initial pricing by around 50bps.  This is exactly what you want for an RMBS issue and it is an indication of strong underlying investor demand. Not only was the deal over-subscribed, we understand that there were also over 50 different investors from 15 countries buying the paper.

I have seen comments along the lines that the pricing is too expensive. Well, it might look expensive against the crazy prices that marked the unsustainable market pre Northern Rock.  But the cost of issuing the deal actually looks good when compared to: firstly, the mortgage rates which are currently being charged to new borrowers, and which all borrowers (and the market) will have to get used to under the new liquidity and capital regimes being imposed by the FSA and, secondly, against the alternative cost of other liquidity instruments, notably the cost of raising senior unsecured debt from the markets.

The most significant aspect of the Perma deal which received negative commentary, was the “put” option.  This enables investors to require the issuer to take back the residue of loans outstanding at the end of five years, which has in turn meant that the assets cannot be removed from the issuer’s balance sheet.  Some commentators have said that this structure means that the Perma deal is a one-off and not indicative of the return of the RMBS market.

However, we do not see it like this. To encourage investors to return to the market you are initially going to have to deal with some of their concerns. As the first deal of note for well over a year, to expect a structure mirroring pre-2008 is unrealistic. As new deals emerge, based on new originations, we do not think that the “put” options needs to feature. 

Is the securitisation market now open again?

The answer is that it is now starting to re-open, with clear demand from investors for new paper structured in the right way.  Given that the majority of the Lloyd’s HBOS mortgages were historic back book loans with a relatively low spread, this looks very positive for newly originated non legacy assets, paying a sustainable rate of interest that reflects current mortgage margins. When these loans are securitised, it will start releasing important new funding to a market that is tragically under-supplied. 

The damage being caused to borrowers and the economy by the current woeful level of new mortgage lending needs to be urgently addressed.  The deposit-taking lenders are doing their best, but only six organisations are achieving 85% of all lending and they are snowed under.  Only the international capital markets will make up the shortfall that the UK mortgage market needs, and this will come through securitisation where, according to the rumours I’ve heard, there are several further deals in the pipeline.