UKAR Easter Feast
19 April 2017 by Douglas Charleston
As the market was winding down for Easter on Thursday, UK Asset Resolution (UKAR) concluded the sale of £12bn former Bradford and Bingley (B&B) Buy-to-Let (BTL) mortgages, with the winning bidders, Blackstone and Prudential buying exposure to £10bn and £2bn respectively. The portfolio of loans are familiar to ABS investors through the former B&B RMBS programme, Aire Valley, set up in the 2004 and possesses a transparent data set through the crisis for investors.
The UK Government took some criticism for the process used in last year’s sale of the former Northern Rock mortgage portfolio (https://twentyfouram.com/en/2015/11/13/a-weight-off-the-markets-mind/), with mainstream press reporting how it was sold too cheaply (despite trading above par) and largely went to private equity buyers. This criticism was perhaps unfair given the competitive auction process UKAR conducted but it was criticism that was taken heed of, as evidenced by the carefully designed sale process for the B&B portfolio.
The first thing UKAR offered to bidders was a level playing field through a backstop financing solution, basically a pre-baked securitisation where the investment grade bonds would be underwritten by the UK clearing banks (Lloyds, Barclays, RBS, HSBC, Santander and Nationwide) at a pre-specified cost.
Secondly, taxpayer value was maximised through a clever mechanism that meant the purchase amount paid to UKAR by the winning bidders would be increased if a minimum amount of securitised bonds (approximately 7%) could be placed at tighter levels with ABS investors away from the clearing bank levels. If this was achieved those clearing banks would be obliged to take the balance of bonds at the same level. The net result being that the ABS investor appetite through tighter spread demand would translate into more proceeds for the tax payer, and it was clear to all that UKAR would shoot for the tightest pricing on the 7%.
The open question for investors was what would happen if demand at the market clearing tight levels was both better than the clearing bank level and large in size. Would UKAR give ABS investors more than the minimum 7% and how should investors size orders knowing this?
Well the process went very well for UKAR, two rounds of price guidance lead to a defined pricing range for the bonds which were better than committed levels, and demand on the eve of pricing was swelling well in excess of the minimum levels. With the ball in its court, UKAR decided to take the unanticipated decision of giving ABS investors a full fill at the tightest end of ranges for each of the investment grade tranches. To put this into context, the Blackstone Ripon deal had a minimum size for the AA rated Class B of £48m (~7%) and UKAR placed £409m (~64%), almost 10x what some may have assumed when placing orders. Across the deal, £2.2bn of AAA and £742m of mezzanine bonds were placed, a significant feast after the period of lent so far in 2017.
We will wait to see if any investors padded orders and got over-allocated, but with a general perception that cash has been sitting on the sidelines, this could go some way to deploying ammunition. The technical balance feels more evenly balanced as we progress into the year so how this proceeds will have the full attention of the portfolio management team.
UKAR’s process has extracted value for the taxpayer, and a functioning ABS market has served its fundamental purpose of reallocating risk through to the capital market.
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