UK Mortgages Ltd - RMBS Market and New Issuance Update
PR Newswire
London, February 26
UK Mortgages Ltd: RMBS Market and New Issuance Update
THE INFORMATION IN THIS ANNOUNCEMENT IS RESTRICTED AND IS NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION DIRECTLY OR INDIRECTLY IN OR INTO OR FROM THE UNITED STATES, CANADA, AUSTRALIA, THE REPUBLIC OF SOUTH AFRICA, THE REPUBLIC OF IRELAND OR JAPAN.
26 February 2020
UK MORTGAGES LIMITED
(a closed-ended investment company incorporated in Guernsey with registration number 60440)
LEI 549300388LT7VTHCIT59
RMBS Market and New Issuance Update
The UK RMBS market in 2020 has got off to a very strong start with four new deals in January - two prime deals from Clydesdale and Nationwide, a Buy-to-Let deal from Precise and a non-conforming deal from Kensington. All these deals showed very heavy levels of oversubscription, further supporting the growing trend seen during 2019 following the introduction of the new regulatory framework for securitisation. This demand has also led to a general tightening in UK RMBS spreads - a positive for the Company, given the intention to undertake a number of securitisations this year.
The first half of February has brought further new deals, and of particular relevance to the Company was the refinancing of the CHL securitisation Auburn 11 into a new deal Auburn 14. Auburn 11 was essentially the "sister" deal to our own Oat Hill transaction, and was originally securitised simultaneously to UKML's purchase of the Oat Hill loan pool in February 2017, which we then securitised into Oat Hill No.1 three months later. Whilst not exactly identical, the two pools are very similar, as our pool was cut as a vertical slice of the original CHL pool. The Oat Hill transaction reaches its first refinancing date at the end of May.
CHL, owned by the European arm of US private equity firm Cerberus, employed a more aggressive capital structure than we are likely to use, but the pricing outcome gives us a good guide as to what levels we may be able to achieve assuming similar market spreads. Whilst our deal would likely be more conservatively structured, we can also look to the credit enhancement levels they achieved for the more senior tranches as guidance for our own deal, when the time comes.
Encouragingly, the deal was announced with the senior notes already fully preplaced and only the mezzanine notes to be sold. In the end they also chose to retain both the BBB rated and BB rated tranches, most probably because they were able to achieve attractive financing terms, albeit there is every likelihood that these could be offered in the secondary market at some point in the future.
The senior notes were priced at a spread of Sonia+90bps to a weighted average life of 2.7yrs, with a 3yr call option. This currently equates to approximately 3 month Libor+78bps, slightly cheaper than L+85bps where the senior notes of Oat Hill 1 were originally priced. In addition, the senior notes made up 85% of the transaction, compared to the 83% in Oat Hill 1, meaning the potential for a better cost of leverage at the senior level when Oat Hill is refinanced were we able to achieve similar terms. The mezzanine pieces also saw great demand, with the B & C classes oversubscribed respectively by 2.6x and 1.4x and priced at S+120bps and S+145bps to the 3yr call.
Were a new securitisation refinancing Oat Hill No.1 to follow a similar structure, and should the top three classes be similar in ratio and price to those of Auburn 14, this would give a weighted average funding cost in the Sonia + low-to-mid 90s bps range, equivalent to just over 3m L+80bps and with nominal leverage in the 10x - 15x range depending on structure.
Were that to be the case, then given our previous estimated range of capital being released by the transaction and potentially available for share buybacks of £30m to £50m, we would expect the available amount to be in the upper half of that range.
It should of course be borne in mind that despite the diminishment of many of the macro and geopolitical issues, such as Brexit and the US-China trade deal, that have dogged markets over the last year or so, the emergence of the coronavirus outbreak has the potential to impact the wider supply chain and global growth, and may ultimately affect all markets. The ongoing development of this situation warrants close monitoring, as it may introduce volatility and potentially cause credit spreads to widen.
UKML Portfolio Update
UKML's deals continue to perform very well. The latest factsheet details underlying asset performance, but as mentioned above market spreads have been tightening and all UKML's deals have performed well in the secondary market too. Oat Hill is getting closer to its call date and is trading at a small premium to par, but even given the short dated nature, its spread has tightened by over 20bps in the last few months. Malt Hill 2, our second Coventry securitisation, is now trading inside 3m L+70bps, and Barley Hill 1, our first securitisation from TML, is bid at around 3m L+75bps. Both these levels are tighter than where the deals originally priced, and are about 25bps tighter than where they were about 3 months ago, boding well for future securitisation plans later this year, when we expect the new TML pool to be ready for a second deal.
Both our warehouses continue to grow well, with the TML portfolio over £180m and the Keystone pool over £170m of completions. Both have been consistently adding >£20m and >£15m of loans per month respectively since Q4 of last year and their pipelines continue to grow. Every month, these volumes are currently increasing our net income by an equivalent of around £600k per annum, helping to reduce the gap to outgoings and ultimately helping us to move closer to a covered dividend position.
Details of further growth will be available in future monthly factsheets and we will update investors on any securitisation timing and details as soon as we are able to.
Further information:
TwentyFour Asset Management LLP
Rob Ford
Douglas Charleston
020 7015 8900
Numis Securities Limited, Corporate Broker
Nathan Brown
Hugh Jonathan
020 7260 1000
Important notice
This announcement has been prepared for information purposes only, it is not a prospectus.
The distribution of this announcement in certain jurisdictions may be restricted by law. Persons into whose possession this announcement comes are required by the UKML, TwentyFour and Numis to inform themselves about, and to observe, such restrictions.
Certain statements in this announcement are forward-looking statements which are based on UKML's expectations, intentions and projections regarding its future performance, anticipated events or trends and other matters that are not historical facts. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. TwentyFour's estimate of the potential gross IRR for this investment is calculated based on certain scenarios and subject to certain assumptions. This and any other references herein to potential future returns or distributions are targets and not forecasts and there can be no guarantee or assurance that they will be achieved. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, UKML undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The information contained in this announcement is subject to change without notice and neither the UKML, TwentyFour nor Numis assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.
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