I was encouraged to see Virgin Money announce its second securitisation of the year, Gosforth 2012-2, particularly so as Virgin Money is also one of the 30 or so banks that have now signed up to the Bank of England’s Funding for Lending Scheme.
The Funding for Lending Scheme (FLS) was introduced by the Bank of England back in July to reduce funding costs for banks and building societies to stimulate lending to UK households and small businesses. Under the scheme, between August 2012 and January 2014 any participating bank or building society can borrow UK Treasury Bills for a 4-year period in exchange for providing eligible collateral as security. Broadly speaking, the eligible collateral will include certain loans, securities and other assets also eligible under the Bank of England’s Discount Window Facility. The costs to participating banks and building societies for this lending depends on how much lending they do into the real economy but can be as low as 0.25% per year. If this results in banks lending more to the real economy at better rates and borrowers have the appetite to take on such debt sufficiently to make a noticeable impact, then that’s great …. mostly.
New sources of funding such as the FLS have significant potential to reduce the number of new securitisations or covered bonds being issued to real money investors. For example, it’s been reported that Leeds Building Society decided to retain its debut UK RMBS, Albion No.1 to use as eligible collateral in the Funding for Lending Scheme.
A reduction of UK public securitisation and covered bond issuance in favour of Government lending will do nothing to repair the normal functioning of the capital markets and whilst initially it might provide some healthy competition in driving spreads tighter, could investors be driven to seek better returns (more reflective of real risk) elsewhere? I guess we’ll have to see. Will US, Australian, Nordic or Northern European issuers be able to take advantage of the dearth of new UK issuance arising as a result of the scheme? Who knows. One thing is for certain, it presents UK originators with an interesting conundrum: what balance to strike between obtaining cheap funding and preserving access to these capital markets, particularly as in four years’ time when the FLS is no longer available we could well have another wall like that being faced by the UK CMBS market. If they get it wrong, I hope there are other refinancing options by then – that is, if the investors haven’t scarpered.
One further interesting development in the Government’s intervention into the debt capital markets is that I saw a report that Vince Cable has confirmed that “a new version of securitisation does have a future” and that the Government is considering establishing an ‘Agency for Business Lending’ to fund the purchase of loans to SME’s via the debt capital markets with the Government guaranteeing the debt. The proposal is subject to a feasibility study being conducted by the Association for Financial Markets in Europe (AFME).
The Government guarantee is seen by some commentators to be an inappropriate risk for taxpayers and that instead transparency of reporting is key. However, I think there are other considerations here such as the versatility this programme might offer the capital markets depending on if and how the proposal is implemented. For example, as the securities are Government guaranteed, they could qualify as ‘eligible property’ for the purposes of Paragraph 68 of Annex VI of the Banking Consolidation Directive and thereby under the Regulated Covered Bond (Amendment) Regulations 2011. I, for one, will be very interested in the outcome of AFME’s feasibility study.