Riskier Mortgage Bonds Thrive Off U.K. Pandemic Property Boom

The business of mortgage securitization is getting a jolt from U.K. pandemic aid and a housing boom that’s favoring lower-end borrowers.

Non-bank lenders have sold more than 17 billion pounds ($24.2 billion) of debt pooling non-conforming and buy-to-let loans, the most in at least four years, according to data compiled by Bloomberg. That’s more than double the amount sold during the whole of 2020.

The spike in mortgage securitization in part stems from the Treasury’s tax holiday on property purchases, which is spurring an unexpected homebuying spree in the throes of the pandemic. With more mortgages to fund, lenders are pumping up volumes of bonds. That’s especially true for those that cater to homeowners who don’t meet typical mortgage criteria.

While pandemic programs boost loans to riskier homeowners, massive monetary stimulus has meant access to cheap funds for their lenders. The Bank of England’s emergency bond-buying program has sapped yields on all types of corporate debt, sending investors further afield to find returns.

Riskier Mortgage Bonds Thrive Off U.K. Pandemic Property Boom

With deals from non-prime lenders paying juicy yields, bond investors are lining up to be on the receiving end of the binge in riskier loans.

Non-prime mortgage bonds rated single-A pay average spreads of about 150 basis points compared with 86 basis points for plain-vanilla sterling credit, according to Bank of America Corp. data.

“Securitization is going to be driven by non-bank lenders,” said Ganesh Rajendra, managing partner at Integer Advisors, an investment advisory firm specializing in private and alternative credit markets. “If the bullish conditions in the RMBS market continue, that will be a significant driver for more issuance among non-banks.”

Traditional banks have also stepped up their pace of borrowing, but by a smaller margin. Many have leapfrogged debt markets in favor of cheaper central bank funding that’s one of the bulwarks of Britain’s response to the virus.

And with programs like help-to-buy continuing to drive the housing boom, even after stamp duty is re-imposed, there’s little to stop the issuance flood, according to Galen Moloney, director, private finance at NatWest Markets Plc.

“Policy measures are not going to go away for a while,” Moloney said. “That means that issuance from non-conforming and buy-to-let should continue to consistently come.”

Europe

The region’s primary market is ending the week on a quiet note, after issuers across all sectors sold over 50 billion euro-equivalent ($60.8 billion) of bonds -- a milestone breached only four times this year, according to data compiled by Bloomberg

  • The State of Hesse and UBM are marketing fresh deals, while high-yield issuers Philips Domestic Appliances and PHM Group plan to close books on euro-denominated notes
  • Credit Suisse’s Hamza Lemssouguer was a rising star until a risk reckoning
  • In the week through June 9, bond funds got $12.5 billion inflows, $3.5 billion went into cash, while equity funds saw $1.5 billion come in, the smallest weekly inflows into stocks this year, according to BofA note, citing EPFR Global data
  • London’s biggest airport will be at risk of breaching the interest coverage ratio covenant in Heathrow Finance debt if it suffers even a relatively small shortfall under its revised 2021 guidance, it said in a presentation Friday

Asia

Demand for new China dollar bonds remained under pressure for a second month since concerns over China Huarong Asset Management Co. first flared.

  • China Evergrande’s dollar bonds jumped to session highs on Friday, rebounding some after their sharp day-earlier declines
  • Sales of Asia-ex Japan dollar bonds slumped this week after the prior period’s surge, with issuance dropping to $5.2 billion from $12.7 billion a week earlier
  • Australia & New Zealand Banking Group Ltd. hired three people to boost its credit coverage in Asia

U.S.

The primary market stayed relatively quiet Thursday after data that showed consumer prices rose more than forecast last month

  • This week’s investment grade supply now stands at almost $36 billion versus estimates of $30 billion to $35 billion
  • The global sustainable bond market has surpassed $3 trillion of issuance, and shows no signs of slowing as the pandemic fuels demand for funds for environmental, social and governance purposes
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

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