A View from the Cockpit - May 2016

Could this be the month that everything changes with a big vote on the 23rd? Of course it will be a close vote, perhaps too close to call, but it will be the economy that takes centre stage. With all eyes in the UK on the vote, it may have gone unnoticed that the “economic headwinds” forecast by the Chancellor have hit our shores with 1st quarter economic growth of just 0.4%, driven almost entirely by increased consumer spending, and inflation unexpectedly dropping to 0.3%. The Bank of England in its quarterly inflation report has cut the UK growth forecast to 2% for 2016 and has revised its inflation target of 2% out to mid-2018 and its expectation of a rise in interest rates to 1% out to 2020! The 10 year Gilt yield closed the month at 1.43%, and has continued to fall further this month.

As anticipated mortgage lending fell back by nearly a third in in April after the increase in Buy-to-Let stamp duty. The Halifax reported that house prices fell back 0.8% in April as a consequence. Martin Ellis, an economist at the Halifax commented that “Current market conditions remain very tight as the sever imbalance between supply and demand persists. While a cooling economy and uncertainty surrounding the UK’s EU referendum in June may dampen the market, the fundamental forces of falling unemployment and low borrowing costs will continue to support prices once short-term factors have faded”. The lack of supply picture is as ever evident in the London area - the Daily Mail reported that the average house price in greater London has breached £600,000, up 7.9% on the previous quarter. However, excluding London, UK values dropped almost 1% quarter-on-quarter to £235,844.

With this benign backdrop to the housing market, the Council of Mortgage Lenders reported the lowest level of repossessions on record at 2,100 in the first quarter of 2016 (1,500 home-owners, 600 buy-to-let). If this rate continues throughout 2016 (and perhaps that is a big IF with the referendum on the horizon), it would put the annual repossession number at 8,400, lower than any year since 1982 (but in 1982 there were only 6.9 million mortgages, against 11.1 million today) – i.e. in percentage terms the repossession rate would be 0.08% this year if the trend continues.

Repossessions, buy-to-let and owner-occupied markets

New Issuance in May

Covered Bond Issuance

After last month’s GBP 750m benchmark from the Nationwide, there was no new Sterling Covered Bonds issued in May, and we would not expect a great deal of issuance this month with the referendum.

In the Eurozone, May also marked the first month of negative net supply this year – i.e. redemptions outpaced the EUR 5bn of benchmark euro covered bonds issued. The UK referendum, FOMC meeting and Spanish Elections portended that issuance should remain light, but some EUR 4bn looks to have been issued in June so far.

Both GBP and EUR covered bond credit spreads are stable to slightly tighter in the month of May.

Sterling RMBS/ABS Issuance

Duncan Funding 2016-1

TSB Bank priced a benchmark GBP3.0bn+ Prime RMBS. However, only the shorter dated EUR A1a and GBP A1b notes were offered to investors. TSB Bank also retained GBP 394.4m of the A1b notes. Demand for the EUR tranche was however healthy:- in excess of EUR 550m. The provisional mortgage pool backing the deal had a weighted average indexed LTV of 60% and seasoning of 36 months.

Holmes Master Issuer 2016-1

Santander UK just sold two senior notes from its Holmes Master Trust programme. The fast paying $375m 0.9 year tranche; and a longer dated GBP 340m 4.8 year tranche which was one times covered by orders.

Orbita Funding 2016-1

Finally, Close Brothers launched its first ABS deal to expand its funding options. The deal was an Auto ABS with 100% fixed-rate auto loan agreements to 83.4% private/16.6% corporate borrowers, secured on 74.6% cars/20.8% light commercial vehicles/4.6% motorbikes. 16.3% were new cars and 83.7% on used cars.