Mortgage Lending vs AAA RMBSAAA-rated UK prime residential mortgage-backed bonds (RMBS) were recently trading at 140 basis points over Libor. This is 14 or 15 times the yield of mid-2007. Are things really 14 or 15 times worse? These bonds are stressed to withstand depressions, not mild downturns.
In addition, prime RMBS are not over-structured-too-clever-by-half products such as CPDOs or CDO squared.
Why would a mortgage lender lend on new mortgages when he can buy AAA RMBS of excellent quality? A new portfolio, if tranched, is typically just over 90% AAA. AAA bonds are, by definition, 100% AAA and offer a wide opportunity for diversification. And most likely a higher yield.
What about investors in general? We're in the realm of the psychological rather than the logical. If you're employed, you're less likely to be fired if you go with the conventional wisdom. That leaves the opportunity for the brave to follow Sir John's advice- or indeed Warren Buffet's version, which is "Be fearful when others are greedy, and greedy when others are fearful".
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That was the headline in the Financial Times of 14th July. Apparently, according to directors polled by Deloitte, over three quarters of directors said that credit was hard to obtain.
There does seem to be a case for funding companies, especially those which are smaller and medium-sized, in ways other than bank lending.
In my teaching capacity at the Dublin Institute of Technology, Dr Joe Coughlan and I recently completed our review of the group projects from the Postgraduate Diploma in Securitisation course. The question which the students were addressing was how securitisation technology could be used by a non-domestic bank wanting to fund Irish companies. The research and presentations showed that either of both of a CLO of loans to corporates or a trade receivables securitisation programme could be a valuable and profitable strategy.
The logic could be extended to many other countries.The UK, as the Deloitte study indicates, is a prime target.
Who is going to put this in place? The structuring and funding are not the hard parts-RHF could organise these. The difficulty is the origination. This might sound counter-intuitive when, as noted above, "credit is hard to obtain". However, it's difficult to get in front of the right customers without an existing relationship and, preferably, a known and trusted name. "No-one ever got fired for buying IBM" was a well-known dictum in the 80s.
What we need is an introducer/stakeholder-either
* A recognised bank which wants to break into new markets
* A respected firm such as an insurance broker
* Accountants or other high-profile advisors
Suggestions appreciated-there is a real business opportunity here.
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An interesting enquiry from a factoring company: they are currently putting together for a corporate customer a EUR100m transaction based on trade receivables.
The interesting part is that the customer is currently funded via an Asset-Backed Commercial Paper conduit at a far lower rate than the factor will be charging him. So why is this customer keen to pay more for his funding?
The answer is certainty of funding-with the 40% decline in the ABCP market the corporate is more interested on certainty of funding (the factoring company is the subsidiary of a pretty strong bank) than on saving basis points.
The nature of the enquiry from the factoring company? What other corporate customers in the same position might consider having some availability of funds from the factoring market. It's good to find someone who is keen to lend in current markets!
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I recently spent a day with a group of Russian leasing companies. They were visiting London, and wanted to know more about raising funds in the West via securitisation and other techniques. Leasing in Russia does look like a significant growth area which will require a lot of funding.
One rather dull but important message which I tried to put across to my Russian friends was to get the systems and procedures up to a rated standard as soon as possible. Even if no securitisation is planned in the near future, the lead time to a transaction is much reduced. In addition, it usually makes the company more efficient.
RHF took one customer through the process of obtaining a servicer rating. The rationale was to be able to generate fee income by acting as servicer or backup servicer on others' deals, but the customer is now without question in a stronger position to do a structured finance deal as and when appropriate.
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This blog is a new addition to the website. These are interesting times in the market, and we intend to post news and views here. Feel free to comment-within the bounds of politeness and decency!-or to get in contact directly on enquiries@robinhoodfinance.com.
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