UK Govt. Unlikely To Extend ABS Guarantee Scheme: Fitch

Sponsored Links

The UK government is unlikely to extend its Asset-Backed Securities Guarantee Scheme, as no one was using it, Fitch Ratings said in a report Wednesday. However, it expects market based solutions to reopen and stimulate the residential mortgage-backed security market or RMBS.

The guarantee scheme which was launched in April 2009 and put in place for six months, is due to expire tomorrow. The scheme was introduced to reopen the UK RMBS market, and offered structured finance issuers government guarantees covering credit or extension risks at a fixed cost at approximately 25 basis points over the Libor, plus the median five year credit default swap or CDS rate for the originator. The government had kept the possibility of an extension open, but there were no takers for the scheme, as the CDS widened significantly at the start of the banking crisis, making the scheme's economics unworkable for most originators, Fitch said.

"A market-led solution appears to be emerging following the compression of RMBS spreads in recent months", Gregg Kohansky, Head of EMEA RMBS at Fitch said. The recently targeted RMBS scheme included a backstop date as to when it would be repaid, which was an important consideration for investors who were concerned about extension risk in the current environment, Kohansky noted.

The firm said it expects near term public issuance to occur out of existing master trust programs rather than new stand-alone pass-through transactions, as the average costs of a master trust was lower and issuers could avoid the administrative hurdle of creating a new programs.

"Although originators may favor the benefits of issuing new RMBS securities from a pre-existing structure, certain investors are wary of master trust structures because of the inability to pick or avoid a particular vintage of assets, the revolving nature of the collateral and the uncertainty introduced by asset and non-asset triggers", Fitch noted.

The firm pointed out that as long as the present market remained a buyers' market, it is possible that originators with master trust programs will also issue stand-alone transactions to meet investor requirements.

(Market News Provided by RTTNews)