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Sonia and RMBS Get Hitched

16 April 2019 by Douglas Charleston

They have been dating for some time, and been the topic of discussion at numerous dinner parties, even its good friend Covered Bond got hitched, but now RMBS has taken the plunge and tied the knot with Sonia (the Sterling Overnight Index Average), having finally ditched long-term previous partner, Libor.

Yesterday, Nationwide Building Society became the first UK RMBS issuer to place a transaction with floating coupons referencing Sonia.

The deal from the established Silverstone master trust programme was priced at Sonia+75bp. To put that in context, the nominal basis between the two rates is currently 10bp (GBP 3m Libor at 0.81% and Sonia at 0.71%), while for a three-year RMBS deal the basis is approximately 15bp – very close to the long term average basis, or equivalent to GBP 3m Libor+60bp. We think this offers a small premium to where Libor based paper trades in the secondary market for a top tier issuer like Nationwide – probably to be expected for the ‘debut’ deal for this new benchmark.

That being said, the strength of the book did not necessarily warrant a material premium, in our view. The book size on the sterling tranche grew to £1.9bn and the deal was upsized twice from the initial £250m target to £750m. While it is hard to extrapolate any incremental demand compared to that for Libor paper, we understand that bank treasury buyers were early adopters of Sonia linked deals and are likely to have supported this inaugural deal. Nationwide also issued a $350m Libor linked two-year note (thus due to redeem before the end of Libor) which at 4.9x subscribed was a further sign of demand for quality short paper. Liquidity in the Silverstone programme is consistently strong and we see no reason why Sonia linked deals should suffer from any soft spots.

As an aside, though by no means an insignificant one, Nationwide also issued the deal under the new STS (Simple Transparent Standardised) framework, another ‘debut’ for a UK RMBS deal, and following on from the first Dutch deal to achieve this standard last week. These lay a strong regulatory foundation for the European ABS market going forward.

But turning back to Sonia, with Nationwide trailblazing other issuers will now feel emboldened to walk down the aisle, and we see no economic benefit to printing sterling Libor deals from this point forward. Marriage isn’t that bad, so let’s hope it lasts!

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