Prime on the menu
Last week saw three UK Prime RMBS deals served up to ABS investors, the most liquid part of the European ABS market.
This has been an underserved part of the European market through the quantitative easing years, with banks understandably preferring cheaper funding through the Bank of England’s second Term Funding Scheme (TFSME) and the European Central Bank’s Targeted Longer-Term Refinancing Operations (TLTRO).
The TFSME itself peaked at £192bn and had a four-year term, but more recently we have seen early repayments of £17bn. Issuers have publicly indicated that RMBS would be one of the funding tools they would use to refinance beyond that maturity wall, essentially meaning that 5 year RMBS deals are en vogue.
Taking Lloyds’ “Permanent” deal first, this was a long-awaited return to the market. The first since 2019, with the publicly placed notes from that deal having matured back in January, this was a benchmark £1bn AAA rated 5 year deal pricing at Sonia+52bp or 4.95% yield. The deal had 27 investors which compares to the 30-35 we have seen in the most liquid continental European deals, for example Mercedes’ German Auto ABS, Silver 15. Lloyds opted to upsize from initial guidance of £500m on the back of this demand and still saw 2.5x coverage. As a result the bonds have traded slightly tighter in the subsequent secondary market.
We also saw a deal from Clydesdale Bank under their Lanark RMBS programme, also 5 year AAA and also pricing at Sonia+52bp (4.95% yield). They chose to cap the size at £500m preferring price tension on this occasion and saw a book that was 2.2x oversubscribed having started with wider price guidance. We have supported Lanark over many years as a consistent issuer regardless of central bank alternatives and they have been rewarded with pricing flat to best-in-class Lloyds Bank.
Finally, challenger bank Aldermore issued Oak No.4, which, despite being a shorter 2.7 year AAA priced wider at Sonia+62bp (5.05% yield) having upsized by £100m to £400m. We view the collateral in this deal as being weaker in quality than the other two, with the targeted customer base being those that cannot typically borrow from the high street banks (for example self-employed), but nonetheless generally prime in nature. This is however compensated through the rates Aldermore charges and a spread premium on the bonds and the booked finished a more modest 1.3x subscribed.
One disappointment is how domestic the investor base remains, with Permanent and Oak No.4 seeing 93% and 96% allocated into the UK, partly a reflection of the currency adjusted basis for EUR investors being less favourable. Though we would prefer a larger overlap from both buyer bases, it does illustrate benefit in terms of liquidity by remaining diverse amongst AAA holdings.
A week with £2bn of prime issuance used to be relatively common but has been a rare occurrence in recent years, so we expect these issuers to be soundly happy with the result, and see it as a job well done. With central bank funding schemes continuing to unwind, we would also expect that these deals could herald a rejuvenation of this market segment in the medium term; with the opportunity to access a broader range of issuers in deals with excellent liquidity a tasty prospect for investors.
