Wednesday, 23 January 2019

Pushing for diversity

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Size alone does not guarantee a borrower access to the capital markets, with concentration limits always providing a potential banana skin to any deal. With this in mind Lloyds Banking Group, boasting a huge balance sheet and the rank of the UK’s largest retail bank, planned its market forays strategically over the last year, flitting between structures, currencies and asset classes to maximise diversity. Anil Mayre reports.

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There are many strings to the bow of Lloyds’ funding strategy, but the one with which it is perhaps most closely associated is its very successful activity in the structured finance market.

Considering Lloyds’ dominance in the residential mortgage market, it comes as no surprise that RMBS accounts for the bulk of Lloyds’s securitisation activity. But faced with an investor base that is still recovering from the fall-out of the financial crisis, Lloyds has branched out whenever possible to tempt new accounts to its funding platforms.

In acquiring HBOS during the crisis with the government’s assistance, Lloyds inherited one of the best known RMBS platforms in the European ABS market – Permanent. But the span of its issuance list over the last year shows that Lloyds is willing to test new waters whenever the opportunity presents itself. Evidence of this is Lloyds’ securitisation of UK credit cards, UK auto loans, Australian auto loans and loans to UK SMEs, in addition to residential mortgages through various subsidiaries.

In May 2010 Lloyds tested the market with an Arkle 2010-1 RMBS structure that included the first Rule 2a7 tranche (aimed at US money market funds) since 2007. It became the largest post-crisis public UK RMBS, aggregating £3.4bn equivalent. US investors’ appetite appeared to have been whetted by this transaction and a US$3bn private placement ensued in June.

Proving its international capabilities, Lloyds switched to its Australian auto portfolio through subsidiary Capital Finance’s Bella Trust platform in July. Its next three RMBS trades cemented its place among the securitisation market’s elite.

In Arkle 2010-2 Lloyds marked the first UK deal to offer yen-denominated bonds. It followed this with the first Australian dollar tranche in a European RMBS in Headingley 1 (originated by Bank of Scotland). Via Permanent 2011-1 it sold a chunky US$2.6bn tranche to the US.

The size of the deals aside, Lloyds has also maintained pricing tension on its issues. Certain investors may not have agreed, but the order books did not reflect a disgruntled buy-side. In Permanent 2011-1, for example, Lloyds priced the euro notes 10bp inside the dollar bonds (at 130bp versus 140bp) as US dollar accounts had been buying euro tranches and swapping to dollars were earning up to 10bp.

“Pricing the euro-denominated notes tighter than the dollar and sterling notes is novel. Currency swaps can influence pricing and some investors swap back euro-denominated bonds into dollar [bonds] to pick up a few basis points. But as an issuing bank we are also aware of currency swap rates and for this transaction we felt it was economically rational to set the coupons at different levels,” Bob Paterson, head of syndicate, said at the time.

Another unusual feature of this issue was a put option. Some commentators have argued this blurs the line between RMBS and covered bonds by offering recourse back to the originator. Nonetheless, the transaction marked another step forwards in the recovery for the European securitisation market.

The UK bank has been a regular visitor to the unsecured bond markets too, with considerable funding needs ensuring its visits have been too numerous to recount in detail, taking in a wide range of currencies and durations along the way.

Among the highlights and the bigger transactions, it sold a 30-year sterling deal to raise £2.5bn in September. In doing so it targeted what one of the leads at the time described as “the hottest part of the curve”, with few issuers – especially financials – interested in venturing out to such duration. The same month it sold the largest ten year euro-denominated UK covered bond of 2010, raising €2bn.

In January it raised US$4.75bn, with US$2.25bn coming via a five-year tranche printed with a 4.875% coupon to yield Treasuries plus 300bp, and US$2.5bn via a 10-year tranche finished with a 6.375% coupon to yield plus 312.5bp.

Then in February it tore up the record books with the largest ever print for a sterling covered bond transaction. The offering came in at 1.25bn, with an orderbook of £2.6bn for an 18-year tenor, with Simon White, head of senior issuance at Lloyds, at the time remarking that the “sterling covered bond market came of age” with the deal.

In March it executed a number of deals, including a €1.5bn three-year deal. Weeks later it priced its €1.75bn five-year at mid-swaps plus 110bp, with the book breaching the €2bn barrier within two hours of launch – further testament to the esteem investors have for the name. Also in March it further demonstrated its versatility with an A$1.85bn trade, split between A$1.1bn of floaters and the rest in fixed rate notes, both due October 1 2014.

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