Royal Bank of Scotland is launching a £4.7 billion ($7.24 billion) issue of securities backed by its mortgages in its first securitization deal of this type since the financial crisis began.
The sale, which marks the ongoing recovery in the asset-backed markets, will represent a significant step for the bank as it attempts to rebalance its funding sources in the wake of the credit crisis.
The return of securitization – the bundling of individual loans into new bonds backed by the loan repayments – is considered critical for the wider economic recovery because of the role it plays in taking loans off banks’ balance sheets, freeing them up to make fresh loans.
The markets froze during the crisis when virtually all securitized products were tarnished by their association with the “toxic” US subprime loans that poisoned US asset-backed deals.
Like many big UK mortgage lenders, RBS became deeply dependent on the securitization markets to fund its rapid growth in new lending at the height of the property market. Since the markets closed it has been forced to rely more heavily on expensive retail deposits and special funding measures supplied by the government, which will start to roll off during the next couple of years.
The deal will act as a bellwether for the wider European market because of its size and the rarity of the issuer. Before the crisis, the UK residential mortgage-backed securities market accounted for about half of all such European issuance.
Investors have slowly been showing more interest in asset-backed deals, helping to push prices down to levels where the deals make economic sense.
RBS is keen to return to the securitization markets for funding as it looks to plug the gap left by the government scheme. Like its state-backed rival Lloyds Banking Group , RBS needs to increase the supply of loans it provides to households and businesses in order to meet its lending targets this year.
Last month it sold a portfolio of European corporate loans worth more than €1 billion (£835 million) to reduce its funded balance sheet and exposure to its leveraged loan book. Earlier this year it issued its first covered bonds – an ultra-safe form of securitization. The mortgage portfolio for the new deal is set to be agreed over the next few weeks.