Mortgage backed securities in £6bn return

Cerberus, the US private equity manager, has bought a £13bn portfolio of Northern Rock mortgages

Cerberus Capital Management has launched what is set to be Europe’s biggest mortgage-backed deal since the financial crisis, attracting strong investor demand for an asset class that has struggled over recent years.

The £6.2bn of securitisation bonds are backed by more than 80,000 pre-crisis loans made by Northern Rock, the failed UK bank. The loans were bought by Cerberus from the UK Treasury late last year in what was the largest financial asset sale by a government in Europe.

The deal, which has been mostly pre-placed with investors, comes at a crucial juncture for the European securitisation market, which has languished since the financial crisis.

“It’s fantastic that it’s come to the market with the kind of demand it has,” said Rob Ford, a portfolio manager at TwentyFour Asset Management. “It gets put on the screens and it’s already pretty much oversubscribed.”

Securitisations, which convert mortgages and other loans into tradable securities, are typically split into tranches that reflect different levels of risk. The triple-A rated bonds on the Cerberus deal have initial price guidance of three-month Libor plus 118 basis points.

Investors have warned in the past that stringent regulations have discouraged demand for asset-backed bonds and weakened the industry, Supporters say securitisation helps fuel the provision of loans to the broader economy

The two lowest risk tranches on the deal were both oversubscribed as of Monday afternoon.

“What it [the deal] is telling us is that there is some depth there,” said Andrew Dennis, a portfolio manager at Aberdeen Asset Management, although he added that accessing this demand “isn’t necessarily done through the more traditional means”.

The Cerberus deal, which was earlier reported by Bloomberg, is an example of a non-bank tapping securitisations markets — a growing trend in the UK. Kensington Mortgages, which is backed by Blackstone and is now part of the rebranded Northview Group, became the largest issuer of securitisations in the UK last year.

The entire £6.2bn of bonds, 5 per cent of which will be retained by Cerberus, are denominated in sterling. “Even with Brexit looming and regulatory uncertainty, there’s still quite substantial demand for securitisation,” said David Covey, head of European ABS strategy at Nomura. “You would likely have a lot more participation for banks and insurers in the UK and Europe if there was a level regulatory playing field.”

Measures to resuscitate the broader European securitisation market are under way. A Brussels initiative for “simple, transparent and standardised” securitisations aims to reduce capital charges for holding the securities, while the European Central Bank is buying euro-denominated ABS as part of its asset purchases

Mr Ford added that the Cerberus deal could have been a bigger boost for the public markets.

“In spite of the positives, the biggest disappointment is that with much of it being pre-placed it won’t become the ‘replacement benchmark’ it could have been,” he added.

Morgan Stanley is the sole arranger on the deal and declined to comment.

Bank of America Merrill Lynch, Credit Suisse, Lloyds, Morgan Stanley and Natixis are joint lead managers, while HSBC and Wells Fargo are co-managers.

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