European Securitisation House
BREAKING THROUGH - RBS has finally broken into the top flight of European securitisation houses, fulfilling an important element in the bank’s plans to become a capital markets powerhouse. Using the group’s own business to develop a powerful distribution franchise, it has also completed significant non-group deals, including Arsenal. RBS is IFR’s European Securitisation House of the Year.
Five years ago, RBS had a niche securitisation business focused on the corporate sector. The rest of the bank’s capital markets-related activity was similarly niche. But since 2000 RBS has transformed itself into a significant player in investment banking, and the development of the securitisation business has been central to that change.
The business is divided into three parts: financial institutions under Mark Hickey, property under Damian Thompson and corporate, which is run by Richard Bartlett. It is evidence of the central role of securitisation with the bank’s capital markets operation, that in May 2006 RBS reorganised its entire debt origination operation along sector lines, bringing the non-structured finance activity under the three securitisation bankers.
In terms of overall momentum, the bank’s rise has been indisputable. RBS’s overall volume of European securitisation business has more than quadrupled in just two years, from US$12.9bn in full-year 2004 to US$43.2bn in 2006 (the year to November 17). A good proportion of that total is due to the bank’s decision to use securitisation more for its own financing needs. In the 2006 awards period the bank completed two major RMBS deals (for £4.75bn and £6.5bn), a credit card deal – the US$5bn Arran Funding Series 2005.
Argument always rages over the relative validity of self-generated business, but for most major players it clearly represents an important part of their business, whether that is non-conforming RMBS from group lenders (Lehman), CMBS conduit business (Morgan Stanley), or prime RMBS and credit cards (Barclays). Nowhere is that more true than RBS, where the securitisation team has been able to benefit from such group-generated business to develop a successful platform for a competitive agency business.
Bankers agree that a key element in any securitisation franchise is being able to maintain a regular dialogue with investors. That is regularly cited as a benefit of having a large RMBS business, although the profitability of that market segment is much lower than most corporate or CMBS business.
This is where RBS scores well. In the 2006 awards period the bank was in the market with one or more securitisation deal for all but two weeks – in December 2005 and August 2006. From Italian leasing ABS (Leaseimpresa) and RMBS (Cordusio 3), through Dutch RMBS (SNS Bank) to UK ABS deals for Consort Healthcare and the headline-grabbing securitisation for Arsenal Football Club – the sales team was in continual dialogue with the buyside.
And that dialogue is global. RBS has 80 sales professionals in London, 20 in Europe and 65 in seven offices across the US. Yossi Kraemer, head of ABS syndicate in London, emphasised the extremely close contact achieved between the bank’s London and Greenwich syndicates, which enabled RBS to sell 11 European transactions into the US in 2006. And that works both ways, as 85% of the bank’s US transactions saw distribution into Europe over the same period.
Take the example of Arran RMBS 2, a September deal that was briefly the largest global RMBS transaction – until it was bested by Lloyds’ Arkle. Arran was upsized despite the presence of heavy competing supply, and generated orders from 120 investors in the US, Europe, Asia, Africa and even Scandinavia.
“Pension funds and insurance companies in Scandinavia have small dealer panels, usually of less than six banks, but RBS is also on those now,” said Kraemer.
While prime RMBS provides the bulk of business for most houses in Europe (Morgan Stanley remaining the exception), other areas of the business are both more profitable and more likely to see innovation.
In Dovedale Finance 1, RBS was joint books on a £101.75m synthetic securitisation of residuals from Leek transactions originated by Britannia. This was the second use of such a structure after Northern Rock’s Whinstone 1 in 2005. RBS was also joint books on RMAC Securities 1, a £1.2bn debut issue from the innovative new non-conforming mortgage-backed MTN programme of one of Europe’s leading non-conforming originators.
In the real estate segment, the bank was arranger and sole lead on a £75m tap issue for Dignity Finance, an owner of funeral parlours, and completed a couple of big deals in the pubs sector, long a mainstay of ABS activity.
Greene King Finance was a £550m whole business securitisation completed in May. The structure of the transaction represented a step forward in whole business technology, facilitated by the unique nature of GK's business compared with its peers.
"GK has a securitisation that has the exact same make-up as its overall business: it can tap this structure in the future but as importantly, if something happens in the underlying market, GK can shift the focus of the securitisation; it will be a microcosm of its wider business," said Colin Lally, a director in the bank’s leveraged finance and property securitisation team, speaking when the deal priced.
Then in September RBS was joint books on a £1.1bn issue of floating-rate notes for Mitchells & Butlers Finance, a major deleverage for the biggest managed pub company. The transaction gave £655m of new financing as well as £450m to refinance its outstanding FRNs.
Pub deals always attract attention, but that pales into insignificance compared to the interest – from the general media, bankers and investors – in anything connected with football.
There had been a number of private securitisation deals for UK football clubs before 2006 but most of these had performed badly. So when Arsenal decided on a public WBS deal to refinance its new Emirates stadium, investors were going to need some convincing. However, alongside joint books Barclays Capital, RBS worked with the Arsenal management on a structure that would achieve investment-grade ratings – a first for this industry.
“RBS was integral to the transaction, and we felt they really lived with us throughout the process,” said Keith Edelman, MD of Arsenal Football Club.
The club sold £260m of secured long-dated bonds to refinance short-dated loans. Though primarily a securitisation of ticket receipts, the structure includes guarantees from and security over assets such as merchandising and broadcasting rights. In addition, the bonds are guaranteed by monoline insurer Ambac. Both the £210m fixed-rate piece (13.5-year WAL) and the £50m floater (7.1-year WAL) were well oversubscribed, with over £1bn of orders in total.
“The corporate ABS market had become range-bound in terms of new sectors. We feel that the Arsenal deal is definitely replicable,” said Bartlett.
The RBS structured finance team was also involved in several restructuring and liability management exercises over 2006. The bank set up a focused ABS liability management business the previous year under Andrew Burton. In addition to Greene King, it worked with South Staffordshire Water, Westminster Healthcare, Werretown and British Land.
The South Staffs deal was the third in the series of issues from Artesian Finance, a vehicle created by RBS to facilitate the provision of long-dated debt to UK regulated water companies. It does this by repackaging loans then selling them through the capital markets. The upfront cost to borrowers is low, and tap issuance allows relatively small loans to be included. In the South Staffs deal there was an exchange offer that allowed the company to extend its maturity profile by 20 years, reduce interest costs, and remove restrictive covenants.
Research and trading activity are an important element of any franchise. The RBS daily research report is generally recognised as one of the best and most useful in the industry, and the bank maintains a team of dedicated ABS traders. RBS puts its total trading volume in the first nine months of 2006 at US$23bn, which must be the highest secondary trading volume in the market, or very close to it.
The advent of Basel II may well reduce the attractions of the RMBS market for the UK clearers, given the competing appeal of the covered bond market on a risk-weighting basis. If that happens, RBS, like the other major banks, will probably reduce its own issuance. But it is now clear that the bank’s securitisation team can more than stand on its own feet and compete with the industry leaders. That is the measure of its achievement.
- Paul Farrow