Meanwhile, the required commitment from participating banks to increase the amount of lending they provide to ‘creditworthy’ homeowners and businesses may provide a renewed flow of assets available for securitisation.
“Although the securitisation markets remain closed at the present time, such an increased flow of assets could be used for the purposes of the Government’s proposed guarantee scheme for asset-backed securities, which is due to commence in April 2009,” says Stuart Jennings, Structured Finance Risk Officer for EMEA at Fitch. “The guarantee scheme offers the chance for a revival of primary structured finance issuance to investors.”
Fitch does not expect the Scheme to have an impact upon its existing ratings of structured finance securities that will be the subject of the Scheme. Categories of assets eligible for the scheme include RMBS, CMBS and CDOs including CLOs. ABS appear to be excluded, however, the Scheme does state that other assets will be considered on a case by case basis.
“The government has structured the scheme to leave the banks liable to a ‘first loss’ and 10% of any subsequent losses. The inclusion of the 10% residual exposure encourages the banks to manage the assets prudently and fulfil the servicing role effectively,” says Ian Linnell, head of Structured Finance for EMEA at Fitch. “This alignment of interests should help to limit losses to the UK taxpayer and support the ratings on these securities.”
The scheme is part of the UK authorities’ broader initiatives aimed at underpinning confidence in the country’s banking sector as well as attempting to free up capital and lending capacity to allow the major UK banks to increase the supply of credit to key segments of the economy.
Availability of credit has been perceived by the UK authorities as a significant factor in efforts to prevent a more serious economic situation developing. Fitch views the package as broadly positive as it provides an array of options to tackle the banking sector’s problems.
