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Outlook - Irish mortgage backed issuance to grow Back  
The past year was a very busy one for the Irish securitisation market, with a number of notable issuers entering the market, including Ulster Bank, Start Mortgages and Treasury Holdings. Looking forward to the year ahead, Fergus Gillen, John Cronin & Adrian Farrell write that the Capital Requirements Directive will significantly influence the market, and along with the continued growth of mortgage lending and the appearance of more niche lenders in the market for whom securitisation is a key funding tool, should keep the domestic mortgage backed pipeline full for the next while.
2006 was a very busy time for issuers of securities backed by Irish originated mortgage loans. While most issuance was concentrated in the prime residential mortgage sector, two notable innovations were the first Irish sub-prime mortgage backed deals and the first Irish commercial mortgage backed securitisation to come to market. The success of these deals demonstrates that international capital markets investors now have a healthy appetite for exposure to Irish originated assets and the steady flow of mortgage backed issuances is expected to continue during the course of 2007.
Statistics published by the Financial Regulator at the end of last year show that residential mortgage lending in Ireland has now exceeded €120 billion in value. The apparently unstinting growth in the residential property market together means that market participants are becoming incentivised to look at more efficient funding solutions. The two classic structured funding techniques for residential mortgage lenders are, of course, securitisation and covered bond issuance, and both have seen some interesting developments in the Irish market of late.
On the covered bond side, both AIB and Bank of Ireland have established specialist bank subsidiaries to issue covered bonds backed by Irish residential mortgage ('designated mortgage credit institutions' in the terminology of the relevant legislation, the Asset Covered Securities Act 2001). To date, issuance of Irish mortgage covered bonds (asset covered securities) by these two entities stands at [€7.5 billion] - all the more impressive when one recalls that the first issue was only in September 2004. The competitive pricing achieved by asset covered securities (all of which have, to date, been rated AAA) and proposed enhancements to the governing legislation, which is expected to be passed this year, would indicate that new issuers are likely to join the ranks of the existing designated mortgage credit institutions within the reasonably near future.
On the residential securitisation side, 2006 has seen impressive levels of issuance from Irish domestic lenders. The Ulster Bank made its debut in the securitisation market in the last month of 2006, issuing €3.8 billion securitisation, one of the largest securitisation transactions in Europe in 2006, and is the first ever multi-currency Irish deal, with bonds issued in euro, sterling and dollars. The deal came hot on the heels of the issue by its sister bank, First Active p.l.c., of €1.8 billion. Including this transaction, Ulster Bank Group (Ulster Bank and First Active) has issued almost €11 billion in securitisation bonds to date, confirming its status as the largest issuer of securitisation bonds by far in the Irish market. Other issuers in the prime market included EBS Building Society which raised €1.5 billion using its Emerald secured loan structure and Irish Life & Permanent plc which issued €2.15 billion from its Fastnet platform.

Outside the prime residential lending arena, Start Mortgages completed the first ever securitisation of non-conforming Irish mortgages in a €370 million deal through Lansdowne Mortgage Securities No. 1 plc and followed up before year-end with a further €525 million through Lansdowne Mortgage Securities No. 2 plc. The Lansdowne deals are the first Irish RMBS transactions by a specialist non-bank or building society lender and indicates the increasing number and profile of niche players within a growing market. Non-conforming mortgage lending (lending to borrowers who, for various reasons, do not meet the lending criteria applied by mainstream banks and building societies) has been practised in Ireland for some time, but Start Mortgages is the first lender to tap this market on a scale sufficient to warrant utilising securitisation as a funding tool.
An interesting feature of the Lansdowne deals is the appearance of a 'Class X Note', which allows a strip of excess spread from the pool at a senior level within the capital structure. The use of a Class X Note has been a feature of many recent commercial mortgage backed securitisations using Irish issuing vehicles, but this is the first time that this technique has been adopted by (and adapted for) a residential mortgage securitisation. It allows for very efficient profit extraction, as the paid-up principal on the note is limited to a nominal amount - usually €50,000. The Irish securitisation tax regime facilitates the use of such profit extraction methods as it exempts securitisation vehicles which are qualifying companies for the purposes of section 110 of the Taxes Consolidation Act 1997 from the usual 'deemed distribution' rules, thus allowing for a full tax deduction on interest paid on notes.

In the cross-border securitisation market, where non-Irish assets are sold to an Irish issuing vehicle, Ireland appears to have become the location of choice for issuers of commercial mortgage backed securities (CMBS). Significant volumes of pan-european CMBS deals have been seen, where the bonds backed by pools of commercial real estate loans secured on properties located in more than one jurisdiction and often diversified between office, retail, general commercial and (in the case of the German market) multi-family residential units. By way of example, Deutsche Bank alone issued three separate pan-European conduit deals under its Deco platform in an aggregate amount of €3.7 billion. Frequently the loans backing the CMBS have been originated by the lenders with a view to future securitisation and this has meant that the origination teams have been conscious of the criteria necessary to ensure that the loans can be efficiently securitised.
While no Irish loans have featured in recent pan-european CMBS deals, Ireland's first domestic asset commercial mortgage-booked securitisation closed in the early part of last year. The transaction was arranged by Eurohypo AG and took the form of a €375 million seven year senior loan to subsidiaries of Real Estate Opportunities Limited, an Irish property investment group with property assets of over €850 million, partly owned by Treasury Holdings. The loan is secured on 14 Irish located properties, all of which were transferred into new property owning special purpose companies. The senior loan was securitised into four tranches of listed securities, rated from AAA to BBB, issued by an Irish special purpose issuer, Opera Finance (CMH) p.l.c. The transaction structure dealt with previously perceived insurmountable insolvency problems in Ireland. In addition, the structure dealt with complex tax issues which can arise on certain Irish property finance transactions. The deal is arguably also Ireland's first 'whole business' securitisation, as effective 'off-balance sheet' pricing was achieved with an 'on-balance sheet' structure.

Looking forward to the year ahead, regulated credit institutions involved in residential and commercial property lending will be considering how the implementation of the Capital Requirements Directive will influence the funding and risk management methods chosen by them, may be weighing up the relative merits of covered bond issuance versus RMBS and may also be considering the capital markets as a means of reducing funding costs for commercial real estate portfolios. These factors, combined with the continued growth of mortgage lending and the appearance of more niche lenders in the market for whom securitisation is a key funding tool, should keep the domestic mortgage backed pipeline full for the next while.

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