In last month’s HBOS securitisation, Citigroup proved that a long-term relationship is still the rock on which deal-making is built. Mark Pelham talks to Citi’s team about the largest retail mortgage-backed securities deal ever seen.
To make history in the capital markets it can often help to have some history with the client. A prime example of this was seen in early March when Citigroup’s deal team, together with co-lead managers Morgan Stanley and UBS, successfully brought to market the latest HBOS retail mortgage-backed securities (RMBS) deal.
At Ł6.1bn equivalent, it was the largest deal of its kind ever seen and at the tightest spreads in the RMBS market’s history. Moreover, they did it in only five days.
The deal team at Citigroup in London comprised Peter Apostolicas, managing director of asset-backed securities and financial institutions syndicate; Bob Liao, director responsible for origination and structuring for UK and Scandinavian financial institutions; and Alison Galt, vice president, Ramnik Ahuja, vice president, and Nicole Biden, associate, from the securitisation group working on the structuring. All have long-standing relationships with HBOS. The same team structured Bank of Scotland’s first master trust, MOUND 1, in 2000, and has done the same with the bulk of the firm’s subsequent financings, pre and post-merger with the Halifax.
Introductory work
Mr Apostolicas says: “In total, we have been bookrunner on six of the seven financings undertaken by Bank of Scotland and HBOS. This latest deal has benefited from a lot of the introductory structuring work and execution that we did on all those deals going back four plus years. It is partly a result of the recommendations we have made over time in terms of how each issue can complement the previous one, how to expand the investor base and how to allow for better pricing; as well as advice as to how to increase flexibility and improvement within the master trust structures.
“All of that history led up to this deal, which turned out to be the largest deal the market has ever seen and, I think HBOS would say, the most successful that it has done to date.”
Collective effort
That success was also due to the issuer itself. “HBOS took a more active role in structuring this transaction, so across the board it was a much more cohesive and collective effort this time around. That helped to add a lot of value to this deal,” says Mr Liao.
With such increased involvement from the issuer, combined with the long-standing relationship and experience of previous similar deals, one might assume this latest transaction would be straightforward. However, the deal, Permanent 4, had its own hurdles.
“The biggest challenge was certainly for the syndicate team in terms of getting the size of transaction out of the door at the pricing we wanted to achieve,” says Mr Ahuja. “In addition, we had to make sure from a structuring standpoint that we used the assets available to us in the most efficient manner, which is, of course, something we look at with every deal.”
Ms Galt adds: “Although the total Trust size increased from Permanent Financing 3, we had to make sure that we used the assets as efficiently as possible to take into account potential future issuance and minimise substitution requirements. A further challenging factor with this deal was that the timing of the transaction needed to be quite quick, and that this was achieved again speaks volumes to the cohesion and the seamlessness of the interaction with HBOS in terms of getting this transaction both structured and to market on time.”
The need for quick timing was driven by market conditions – when HBOS began planning the deal the market strongly favoured issuers. As a result, Citigroup advised a change of plan and swift action.
HBOS had originally contemplated going to the US, Europe and even Asia to expand the universe of investors familiar with its product. Mr Apostolicas says: “Given the good market conditions and the fact that HBOS has become the premier benchmark issuer in the market, we recommended that they go right into the market without a roadshow. We argued that, on this occasion, it made a lot of sense to forego any type of roadshow work and that HBOS could demonstrate to the market that it could do a large deal of this nature in three currencies and get it all done within five business days – which we achieved.”
The short timeline was met thanks to good groundwork, he says. “It was very much a result of all the work that the structuring team had done. They put the syndicate groups in a position where on day one we had the full base documentation: offer materials, marketing materials and the right capital structure that was configured efficiently with the assets at hand,” he says.
Consequently, as soon as the deal was announced it went immediately to price talk and at the same time specific investors were targeted. The strategy proved to be a great success, with the deal being upsized from Ł4.5bn to Ł6.1bn and all of the 19 tranches priced either inside or at the original price talk.
For example, for the euro floating rate note (FRN) tranche, which has a five-year average life, and the sterling FRN, with a seven-year average life, price talk had been plus-15 basis points and 18bp respectively, but both priced 1bp tighter. This was despite both tranches being upsized dramatically – the euro from around 900m to 1.5bn and the sterling from approximately 500m to 1.1bn. Equally, the majority of sub-tranches were priced between 3bp to 5bp inside the original price talk. “On an overall deal basis we achieved an average margin of about 17bp for a weighted average life of around 4.6 years,” says Ms Biden.
Tailoring deal to market
Mr Apostolicas explains: “At given points in time, you tailor the size of a deal to the conditions in the market. As we were leading up to the HBOS deal, it was apparent that even though market conditions were very strong, there was very little in the way of competing supply and that with the leading issuer coming into the market with a high quality issue, they were going to be able to push the limit at that point in time.”
The end result was that HBOS has set new standards in benchmark spreads, which their competitors will inevitably attempt to duplicate – or at least get close to.
However, Mr Apostolicas says: “Although each subsequent issuer will undoubtedly test the market in terms of spreads, I’m not sure that there are other issuers that need to present that much size to the market. HBOS is currently unique in the size and scope of its business and the ability to put forth a transaction of that size, given the amount of capital raising they will do over the course of the year.”
The deal is also performing well in follow-on trading, according Mr Apostolicas, speaking on March 16. “We priced the deal on March 1 and it’s been free to trade since March 2. Everything has traded up modestly since then, and is anywhere from 5˘ to 10˘ higher in price, with some tranches trading more actively than others – but I guess that’s a pretty good representation of the market.”
Promising future
With such a landmark deal now history for them, the Citigroup team is looking to the future and that, too, seems promising.
“We have a very solid pipeline for the rest of the year, says Mr Apostolicas. “We are currently in the market with an Australian mortgage issue with Commonwealth Bank of Australia, and will be announcing one or maybe two more asset-backed securities issues for execution at the end of March or beginning of April and some more mortgage-backed securities to be announced by the end of March. The team is involved in a number of asset classes, and while RMBS and commercial mortgage-backed securities will always be a big part of our business, we continue to work on a number of one-off interesting assets, for example, leasing deals and consumer loan-based transactions.”
In addition, Mr Liao says: “This team is also responsible for the development of the UK covered bond market – we worked on the first covered bond with HBOS last year, for example. There are some other mandates that are out there in the sector and we are hopeful that the market will continue to grow and that we’ll get the opportunity to work on some of those transactions as well.”
