A tough call
As spreads marched steadily wider in the months following Russia’s invasion of Ukraine, the spectre of extension risk began to loom over the European RMBS market. Step-up coupons designed to incentivise calls began to look less punishing than a dicey refinancing.
This was especially true for chunky securitisations of non-conforming mortgages with call dates coming up in the second half of the year. Among them was Hawksmoor Mortgage Funding 2019-1, a £2.5bn deal backed by legacy UK mortgages and sponsored by hedge fund Davidson Kempner.
But while concerns about call risk turned out to be justified in some cases, Davidson Kempner kept the faith with the Hawksmoor bondholders, in large part thanks to the efforts of Bank of America, which priced a refinancing of the underlying mortgages along with three other loan pools as sole arranger in August.
It was a challenging deal in a tough market environment.
To begin with, there was its sheer size. The largest broadly syndicated deal of the year in the European securitisation market, Stratton Hawksmoor 2022-1 comprised £2.1bn of notes across 10 tranches. The Triple A rated Class A1 tranche alone was more than £1.71bn.
And that is where the refinancing strategy had to begin. Asking the holder of the senior Hawksmoor notes to roll over into the new deal might have been the obvious thing to do, but with no other credible buyer, the investor would have enjoyed considerable leverage in the pricing discussion.
Instead, BofA spent months cultivating another investor, one that was already familiar with most of the collateral but had been absent from the market for several years, and rekindled its interest in the assets.
“This account was very familiar with, at least, the Hawksmoor collateral, because they'd owned the bonds [before the 2019 refinancing],” said Prashant Sood, managing director for structured finance origination at BofA. “But still, it was starting from scratch.”
The hard work paid off, producing an indication of interest well ahead of pricing. This derisked the deal and allowed the distribution effort to move on to the mezzanine tranches.
Here, BofA placed its mortgages trading desk at the service of the client, backstopping the mezz notes to ensure competitive pricing.
“It just shows the full scale from BofA,” said Tristan Cheesman, the bank’s head of European ABS syndicate. “We worked very closely with the trading desks there to backstop the mezz at levels that I think were very aggressive.”
Alongside Hawksmoor, the offering refinanced Clavis Securities Series 2006-1 and Series 2007-1 and Stratton Mortgage Funding 2019-1. The collateral comprised pre-financial crisis buy-to-let, right-to-buy and owner-occupied mortgages mostly originated between 1987 and 2009 by GE Money Home Lending, Igroup Mortgages, GMAC, Wave and Edeus.
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