Rumours this morning were doing the rounds that a UK mortgage bank was aggressively trying to buy 6 month money in the debt market and was paying Libor +++. A look at the stocks and it’s Alliance & Leicester that’s again taking a hammering, down 7 per cent at one point in morning trade.
It’s not too hard to see why. A&L has a big MTN programme as part of its funding that it’s dependent on, so A&L makes a good “someone” in search of 6 month paper.
It also fits because A&L is known to be trying to expand its MTN profile. Last month, October 9, the A&L board authorised a $15bn expansion. The A&L Euro MTN programme is now capped at $40bn, up from a previous limit of $25bn. The reasons for that growth are not clear – it may well be part of a natural business expansion. But a significant slice of A&L’s other funding comes from commercial paper markets – around $9bn. Assuming the sector wide CP freeze has affected A&L, it’s not hard to see why a renewed focus on MTN issuance might make sense.
But A&L is quite clear that it’s not in trouble. A statement released today said it could see no reason for the share price tumble, and it was continuing to source funds “at around Libor”.
Consider also, by way of context, that A&L has a very different funding model to Northern Rock. It doesn’t have a particularly large securitization programme, like Northern Rock did. A&L’s equivalent of Granite Master Issuer is the Fosse Master Issuer – and it only weighs in at around $5bn.
And for what its worth, Standard & Poor’s gave A&L a stable outlook just a week ago.
So if A&L isn’t likely to be in trouble, who is?
Consider this graph, courtesy of S&P, of loan-to-deposit ratios. On the left hand are aggressive business models dependent on capital market funding far more than retail deposits. Seen against its peers, A&L really isn’t too badly placed.
It’s also clear that there’s quite a significant leap between Northern Rock and other UK mortgage banks – HBOS, B&B and A&L. Of the three it’s HBOS who should be bearing the most scrutiny. Not only does it have a slightly higher loan-to-deposit ratio than its peers, but it also has a funding model most similar to Northern Rock’s. Northern Rock had the largest dynamic, continuous issuer mortgage securitization trust in Europe – Granite. HBOS has the second largest – Permanent Master Issuer, worth $43bn. Oh, and there’s also Mound Master Issuer ($9bn) and Pendeford Master Issuer ($9bn).
Here’s the HBOS funding profile:
