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Using securitisation for funding diversification Back  
Gerry Murray discusses the history of securitisation in First Active, and charts its development from the first two securitisations which were demutualisations to the latest which are ‘true sales’.
First Active Plc is the largest, most frequent user of the securitisation market among Irish financial institutions. Through the Celtic Residential Irish Mortgage Securitisation programme we have had a total of seven issues of owner occupied residential mortgages worth a total of E2250m securitised. Our first experience of securitisation goes back to 1996 when we privately placed a pool of mortgages with a group of four investment banks. This was pre our demutalisation and a secured loan structure had to be put in place rather than a ‘ true sale’ in order to preserve the membership rights of our mortgage customers in the event of demutalisation .Our first two public deals, Celtic’s 1 and 2 in 1998, required the same structure. Since 1998 our other transactions have been ‘true sales’ of the mortgages into a special purpose vehicle (SPV), which sells bonds to finance the transaction.

First Active Plc uses the securitisation market for the following main reasons (i) it gives us non recourse funding of our mortgage portfolio while retaining the customer relationship and lending margin (ii) it leaves us with a lower regulatory capital requirement (iii) a lower liquidity requirement and (iv) gives us diversification of funding sources. That said, embarking on a securitisation is a major commitment in terms of the resources required to bring a transaction from the drawing board to the market and a large transaction is necessary to cover the substantial fixed costs.

The appointment of a number of key advisors is the first step in getting a transaction off the ground. These include an investment bank to arrange and distribute the securitisation, legal advisors for the originator (First Active Plc) and the issuer (Celtic’s), tax advisors and accountants. Indeed as most transactions take place under English law we have found it necessary to appoint different sets of legal advisors for the one entity with respect to Irish law and English law. As the transaction progresses, further appointments are necessary such as paying agent, trustee and the rating agencies if you wish to have the transaction rated.

In terms of appointing investment banks to arrange and distribute we have switched a number of times. Celtic 1 and 2 were arranged and distributed by UBS, Celtic 3 and 4 by Paribas and Celtic 6 was arranged by CSFB and jointly distributed by CSFB and ABNAMRO. Our most recent issue, Celtic 7 was arranged by BNP Paribas and jointly distributed by BNP Paribas and Royal Bank of Scotland. The reasons for changing are primarily to open up new investors to First Active and the Celtic programme, to introduce an element of competition among potential arrangers and hence lower arranging fees and to keep First Active aware of the different possible structures available in the market.

Once the broad structure is in place the rating agencies become involved in determining the level of credit enhancement that is required in the transaction in order to achieve the desired rating, in our case AAA on the most senior tranche. The credit enhancement can take a number of forms and combinations, a subordinated loan from the originator, over-collateralisation and junior tranches of notes in the transaction. We currently use two rating agencies, Moodys and Fitch, as investors like to see two ratings with slightly different methodologies for deriving their ratings. The rating agencies also produce pre-sale reports, which provide a step-by-step guide to the mechanism of the transaction which investors find useful. From the investor’s point of view, rating agencies provide an independent view on the security of an issue, which can be relied upon by investors. In addition, the agencies have developed useful web sites that outline their rating methodology for different asset classes and provide information on issues they have rated.

Once the structure is agreed and preliminary ratings assigned we move to the selling stage of the transaction. Research from the distributors is normally produced to support the issue and sent to potential investors. A road-show is then arranged, with the purpose being to increase demand and widen distribution while meeting and building relationships with investors. It also serves to increase the awareness of First Active Plc in general and in the securitisation market in particular.

Our recent road-show presentation for Celtic 7 in October included an overview of First Active, the Irish housing market, the transaction structure and details of the collateral quality. This issue is the largest to date under the Celtic programme with a total of E650 million issued, E615.8 million of AAA rated notes at Euribor +26 bps and E34.2 million of A rated notes at Euribor +65bps.These have a step-up of double the interest rate margin over Euribor after seven years if they are not called. In terms of pricing this transaction was at the better end of our expectations particularly against the background of uncertainty that existed in international financial markets at the time. We marketed the issue extensively in conjunction with BNP and RBS visiting London, Frankfurt, Milan, Paris and Madrid in addition to Dublin. In terms of distribution we had 35 different investors in the AAA notes, with 12 different countries represented. The issue was 30 per cent oversubscribed.

Finally the on-going provision of information to investors is another key requirement as investors need to be informed regarding the performance and security of their investment. To facilitate this, reporting on all Celtic issues is available on the web and up to date and historic information on the performance of each securitisation pool is available.

While securitisation should not be undertaken lightly we have found it to be a useful addition to our funding mix over the years.

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