Pfandbriefe/Covered Bonds 2005 - Abbey to revive UK market
With a 10.4% market share of mortgage stock, Abbey is the UK's second largest mortgage lender, now owned by Spain’s Banco Santander Central Hispano. While set to become the first new name in the UK sector for more than a year, any suggestion that its plans might signal the beginnings of cross-border asset pools appear premature, as Helen Bartholomew reports.
For Abbey, 2004 was a year of restructuring on the back of the acquisition by SCH last November. Net lending market share for the year was significantly reduced at just 3.1%. Other factors have been at play, including the introduction of new UK mortgage regulation that led the bank to withdraw some products, and a strategic decision to move away from lower-margin business.
Earlier this year, Abbey appointed Barclays Capital, Citigroup and Deutsche Bank as lead arrangers for its €12bn covered bond programme, with the inaugural issue set to launch prior to the summer break. Aside from access to cheaper funding, the issuer is also looking to broaden the investor base and extend the liability profile.
According to Chris Fielding, head of treasury services at Abbey, all three targets have equal importance. "None of these factors were given precedence over the others. Our view is that covered bonds represent a blending of the three and offer the total package of what we are trying to achieve."
The new covered bond programme is expected to take out at least part of the funding that has previously been issued off the securitisation platform, Holmes Funding Master Trust. Although there has been no activity from that programme over the last year, Fielding confirms that the two will continue to run, with each developing in slightly different directions.
"Over time we expect covered bonds to become an important tool to be used in conjunction with our securitisation programme. Covered bonds may take out a portion of the securitisation programme but the two can easily run in parallel. We might see the covered programme develop more towards the longer-dated euro issuance while the Holmes platform could develop more towards shorter duration dollar notes."
The lack of a single legislative framework has been seen by some as a hurdle for UK covered bond candidates, and bankers are hoping that the FSA's drive towards a UCITS compliant framework will be a catalyst for market growth. Like the UK's three other issuers – HBOS, Northern Rock and Bradford and Bingley (B&B) – Abbey will be going ahead without such legislative support, but bankers believe the lack of clarification should be no barrier for new names.
"A UCITS compliant framework can only improve the situation. At this stage I don't feel that potential newcomers in the UK covered bond market would hold off just because of risk-weighting considerations," said Fritz Engelhard, covered bond analyst at Barclays Capital.
Although the issuer has yet to confirm the structure of its inaugural transaction, it will closely resemble that used by both Northern Rock and B&B – a structure that most covered bond bankers believe offers a working template for newcomers.
"There is certainly a preference to have some kind of uniformity in the UK market, as issuers don't want to require investors to continually familiarise themselves with new structures, and it is natural to see a leaning towards the most recent structures," said Jeff Stolz, covered bond structurer at Deutsche Bank.
Abbey's ownership structure presents some interesting potential developments as parent Santander is also a covered bond issuer. Some bankers speculate that cross-border covered bonds could emerge in the future, with UK covered bonds backed by Spanish mortgage assets and vice versa. While some bankers believe that Abbey could be a trigger for cross-border transactions, others believe it is a long way off, particularly with a limited number of issuers having any cross-border exposure.
"The key point is the cross-border transfer of assets, which can be more or less complicated in different legislations. While economically it makes sense – as it helps create more diversified pools – in the current environment it will be mainly driven by the lending business of the issuers, and at this stage the main focus is on funding the domestic business," said Engelhard.
Abbey's Fielding believes that while the discussion may be valid, speculation is certainly premature. "There are lots of discussions at European level but it isn't something we currently see demand for. If investors saw some big advantage and were prepared to pay for it – or issuers could perceive an opportunity to further diversify funding – then it is a possibility, but for the time being it seems that there is no particular driver for either investors or issuers."