Investec PLC, the South African bank, is seeking to revive the market for subprime mortgage bonds in Europe three years after the securities were blamed for the worst financial crisis since the Great Depression.
Investec is selling as much as 130 million pounds ($205 million) of top-rated five-year notes at a yield spread that’s 16 times pre-crisis levels, according to two people familiar with the deal. U.K. buy-to-let specialist Paragon Group of Cos. PLC is also preparing a sale of non-conforming mortgage bonds.
Investors are seeking riskier, higher-yielding securities as central banks’ low interest-rate policies to stoke economic growth keep yields on government and corporate debt close to record lows. The collapse of the U.S. subprime-mortgage market was the catalyst for the global credit crunch that caused $1.8 trillion of bank losses and writedowns since 2007.
“Investors are seeking yield and non-conforming is one of the few places to find it,” said Mirja Wenski, a Dublin-based managing director at Harbourmaster Capital Management Ltd, where she helps to manage about 8.3 billion euros ($11.4 billion) of assets including securitizations.
A London-based Investec spokesman, who declined to be identified, wouldn’t comment on the transaction.
Investec’s notes may yield about 3.25 percentage points more than the London interbank offered rate, said the people, who declined to be named because the sale isn’t completed. That compares with 0.2 percentage point on non-conforming notes sold by a Lehman Brothers Holdings Inc. unit in August 2007, Europe’s last public sale of the debt, JPMorgan Chase & Co. data show.
Banks create mortgage-backed securities by pooling home loans and selling them to investors as notes, allowing lenders to raise capital more cheaply than by issuing unsecured debt. Non-conforming lending covers mortgages to borrowers with no or poor credit records or loans to landlords.
Investec’s bonds pool loans made by its London-based Kensington Group PLC mortgage unit, Bank of America Corp.’s Mortgages PLC, Money Partners Holdings Ltd. and GMAC RFC, the former financing unit of General Motors Co., according to a Fitch Ratings pre-sale report on the deal.
Investec’s bonds are part of an 186 million-pound issue that includes about 45 million pounds of securities to be retained by Residential Mortgage Securities 25 PLC, the special- purpose company set up to pool the loans and issue the notes, the people familiar with the transaction said.
Paragon, which got a 200 million-pound credit facility from Macquarie Group Ltd. to provide loans to landlords, expects to return to the mortgage-backed securities market next year, Financial Director Nicholas Keen said in an interview.
“The economics are working again for our business,” Keen said. “We are offering mortgages at rates between 4 to 5 percent, while we expect to raise debt at around Libor plus 200 to 250 basis points, according to the feedback we have received from investors.”
Investec’s transaction is a test for the securitization market amid evidence the U.K. property market is worsening. House prices fell the most since at least 1983 in September, according to Lloyds Banking Group PLC, while the International Monetary Fund said Oct. 6 that home values are “still high” and policy measures may not be enough to avoid a further drop.
Investors may still be wary of subprime debt. Bank of America tried to sell 122.5 million pounds of lower-rated bonds backed by non-conforming mortgages in June, according to three people with knowledge of the deal. The sale hasn’t been completed, Bloomberg data show. A Bank of America spokesman, who declined to be identified, wouldn’t comment on the sale.
Investec and Paragon are returning to the bond market as delinquencies on non-conforming loans included in securities rated by Moody’s Investors Service dropped to 18.6 percent in August, down from as high as 21 percent in June 2009.
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