In a market that has been at best subdued for securitisation lawyers, Allen & Overy (A&O) and Sidley Austin ought to be feeling rather good about themselves.
The two firms have just completed a £2.8bn residential mortgage-backed securities (RMBS) issue for Lloyds TSB, which has been heralded as the deal to kickstart the securitisation sector.
“It’s a positive statement on the market,” says Sidley finance partner Rob Torch, who advised bookrunner and anchor investor JPMorgan. A&O partner Angela Clist led the team for Lloyds.
The roots of Sidley’s and A&O’s involvement on this triple-A-rated deal actually date back to 2002, when HBOS – which was taken over by Lloyds last year – set up its master trust programme. Since then the two firms have worked together on some 14 issues from the programme. But it is fair to say that none of those deals has created such excitement as this one, despite its plain vanilla status.
“The structures look complex, but the assets backing the deals are relatively straightforward,” says Torch. After all, in an environment of enormous financial uncertainty the plain vanilla deals are the ones that investors want.
Maturity purchase was a key feature of the deal; Lloyds has pledged to buy back the notes in five years to remove uncertainty on the part of investors. This is something that has been discussed widely in the market for a while, but the fragility of the current economy makes the Lloyds deal a pioneering one.
“People in the market were very focused on this, it was very important for investors,” says Torch, who namechecks JPMorgan assistant general counsel Paolo Zampiga for helping to drive through that element of the deal. “The mechanics of how that is going to work is very much related to disclosure.”
As a result there has been investor interest; that is to say, ‘real’ investors such as pension funds rather than rinky-dink special investment vehicles. The Lloyds deal was doubly oversubscribed.
It made a change. Since the financial crisis securitisation lawyers have simply worked on repo transactions, which accounted for enormous issuance during 2008. These retained deals were being held by the European Central Bank and the Bank of England under the liquidity schemes, but real investors shied away from public RMBS transactions.
Although few have mourned the exit of those buyers who focused on the triple-A rating without much analysis of the underlying collateral, lawyers agree that the important thing was to attract back the credit buyers, who would take time examining market risk and invest accordingly. A&O’s and Sidley’s work on maturity purchase was crucial.
“A true public deal needs investor confidence, and anything to create investor confidence is going to help,” says Slaughter and May securitisation partner Christopher Smith.
The timing of the Lloyds deal was accidentally cute, as it came hard on the heels of two other asset-backed transactions that caught the imagination of the market. They are the VW securitisation of car loans and the £559m Tesco securitisation arranged by Goldman Sachs – Tesco’s second public issuance this year.
Of course, they represent different asset classes, but taken together, these three transactions represent a welcome surge in activity. “There’s going to be a need to do the deals,” comments Clifford Chance securitisation partner Kevin Ingram. “The pricing is getting better and large institutions need to diversify their potential funding sources. It’s a virtuous circle.”
Jim Rice, Linklaters
“I am quite optimistic that, one way or another, our securitisation practice will be busy over the next year. Utility whole business deals (water, electricity etc) and infrastructure-related deals will continue to provide a good source of work – we are already seeing this with deals such as Yorkshire Water and Electricity North West. We will also see a pick-up in real estate-related deals and other asset-backed securities categories, including through conduits. On top of all this we will continue to be involved in a number of situations resulting from the credit crunch, including restructurings, liability management and government-related work for the banks.”
Kevin Ingram, Clifford Chance
“The start of the year ahead for securitisation will see the re-emergence of an industry from a bunker into a post-apocalyptic wasteland. The key issue for the rest of the year will be how the rubble will be rebuilt into a new public securitisation market. It is clear there will
be significant new regulatory and accounting architecture: the G20 no less are demanding that. There will also be heightened disclosure and transparency for investors along with increased due diligence. The roles and responsibilities of transaction parties, such as rating agencies and trustees, will be reappraised and most likely changed. Sophisticated legal analysis will be applied to simplify securitisation products. Some structures and products will succeed and others will fail (think VHS vs Betamax). Above all there will be rapid and radical change and lawyers will need to be insightful and innovative to keep pace.”
David Krischer, Allen & Overy
“I don’t think any one asset class will predominate. What investors will want is clarity as to the credit analysis, simplicity of structure and above all else a straightforward intercreditor position. This can arise in a number of ways and, much like the early days of the market, it is those people who can find the clever one-off opportunities who will do best. The other key area we will be watching is how the central banks unwind their asset-backed security purchase programmes and whether they can do this in an orderly way, which brings people back into the market.”