Coming out of the summer, we felt the European ABS primary market would see heavy supply, with continental issuers taking advantage of a slow start to the year by using ABS to address annual funding targets, but also increasingly using ABS as a capital management tool. This has played out and demand has been extremely strong, as investors have shown a willingness to take money off the side-lines, aided by a tailwind from the additional stimulus announced by the ECB on September 12.
UK issuers, an ever present component of the market, have had to tussle with the added uncertainty surrounding Brexit, and we like many others did expect a disorderly supply calendar as a result. However, as the autumn season has progressed, we have been taken aback by two things in the UK.
Firstly, we have seen only three RMBS deals from UK banks or building societies, namely regular issuer Yorkshire Building Society, challenger bank Aldermore and regional lender Leeds Building Society. While others may test the market in the coming weeks, we sense mainstream lenders are better funded than many market participants believed, and continue to have a broad array of funding tools at their disposal.
Secondly, we have noted how well received these deals have been. We typically see subscription levels for European AAA bonds between 1.5x and 1.75x, with UK paper typically being at the lower end of that in recent months amid lower interest from continental investors. On these recent deals we have seen a marked increase in orders from bank treasuries, averaging 60%, in part boosted by more favourable regulatory treatment under Simple, Transparent, and Standardised (STS) label and the Liquidity Coverage Ratio (LCR).
Looking at each deal, Leeds being a small lender has historically priced at the wide end, but attracted a book of 3.75x on a £250m deal last week, printing at Sonia+68bp (equivalent to 3mEuribor+46bp) against initial guidance in mid 70s. Aldermore, which typically draws a smaller investor base, managed to issue a deal backed by alternative-prime loans at the top end of its size range and at Sonia+80bp/1.51% yield (equivalent to 3mEuribor+58bp), which we viewed as a strong price for the issuer. Yorkshire has followed larger peers and established a valuable US investor base, allowing it to issue in both dollars and sterling. These tranches were 2.5x and 3.0x oversubscribed, respectively, in a deal totalling £520m equivalent.
US buyers of UK RMBS have historically recognised its credit quality and bought dollar denominated notes, eyeing relative value against domestic paper. In contrast, we have generally seen mixed participation from continental European investors during the last 18 months (they took just 1% of the Yorkshire deal). We feel this reticence is unwarranted on a relative value basis – a comparable three-year AAA rated Dutch RMBS, for example, currently offers around 3mEuribor+15bp – but it has preserved a premium for patient investors in UK paper.
There are some parallels here with our recent blog on Nationwide’s latest AT1 deal and its warm reception by capital markets. Strong UK issuers are still attracting meaningful demand and in our view can provide value despite the Brexit uncertainty.