IFR Top 250 2007: On the racetrack
Lloyds TSB has become a keen user of securitisation techniques. This is a considerable change for the UK clearing bank that used to be a mere buy-and-hold player. In 2006, it brought the largest-ever RMBS deal to market and is now looking to securitise new asset classes. Jean-Marc Poilpre reports.
Like RBS, Lloyds TSB only jumped on the residential mortgage-backed securities (RMBS) bandwagon last year, well after peers such as Barclays and the small but prolific Northern Rock.
But it still made quite an impression. Its inaugural transaction, named Arkle 2006-1, was the largest ever globally with some £7.022bn of RMBS sold to nearly 200 investors. The deal was upsized from £5.6bn due to overwhelming investor demand.
This was Lloyds TSB's first venture into the securitisation market after the UK clearing bank decided to move from a buy-and-hold approach towards an origination and distribution framework. The bank, which turned its back on investment banking 20 years ago, has been steadily rebuilding its DCM capability in recent years and has developed a capability to structure and distribute financial products.
The bank's DCM headcount increased from 20 to about 110 in three years. In the case of the securitisation team, the number has risen from fewer than 10 people to about 35, including the distribution capability.
Lloyds TSB uses securitisation primarily as a regulatory capital management tool, with the financing dimension coming second. "Securitisation is a significant component for the group's funding as it generates medium-term funding, but we primarily use securitisation as a way of achieving a flexible balance sheet," explained Ed Short, head of liquidity and fund management at Lloyds TSB Group corporate treasury.
The bank changed its business model about three years ago. "We now turn capital over more rapidly," added Mark Grant, managing director and head of debt capital markets, who headed up the bank's DCM growth. "Our wholesale business is growing organically faster than in the past and this requires a more flexible approach to capital management."
To date, Lloyds TSB has brought three RMBS transactions. The least expected was a re-run of Arkle last December. The deal was sized at €3.25bn, and its benchmark tranches tapped a slightly shorter part of the curve – 4.2 years versus 5.5 years for the long-dated notes of Arkle 2006-1.
In May this year, Lloyds TSB priced Arkle 2007-1, a niche transaction as it offered bonds with a weighted average life of 0.96 years, which is highly unusual for European RMBS. As for all its securitisations, the bank had Basel II in mind when it opted for very short maturities.
Helen Weir, Lloyds TSB finance director, explained in a statement that this third Arkle transaction focused on the short-dated end of the market, which fitted the firm's requirements at the time.
According to Grant, Lloyds decided to tap the RMBS market first because: "[it was the] most developed and this therefore seemed to be a good place to start. Moreover, our Cheltenham & Gloucester unit has a high quality portfolio and, being a new name, it had some scarcity value."
In October last year, Lloyds privately placed a synthetic UK SME CLO called Ascot Black that pooled 1,606 loans in a portfolio of £1bn.
The bank's DCM team also worked with Intermediate Capital Group on Eurocredit VI, a €500m CLO of leveraged loans, as arranger and in the construction of the portfolio. The first two Arkle deals were jointly structured with Citi, while the SME and leveraged loans were structured in-house.
A CMBS transaction is said to be in the offing. According to Lloyds TSB, some of its commercial loans will be securitised in the future, and some loans will be held. According to market sources, the first deal will be synthetic and have a structure similar to HSBC's inaugural deal, Nemus, which referenced loans not specifically originated for securitisation – hence the synthetic structure.
Other asset classes such as credit cards, auto loans, personal loans and commercial loans could follow, but Basel II will play a key role.
"Future RMBS issuance will be influenced by the relative attractiveness of alternatives, and the impact of the Basel II environment," said Short, adding that covered bonds are an obvious alternative from a funding perspective.