Dutch Securitization Features New Hedge for Rate Mismatch
Delta Lloyds' latest Dutch residential mortgage securitization has an innovative work-around to regulations that make it unattractive to use swaps to hedge interest rate mismatch.
The €770 million deal, Arena NHG 2014-I, is backed predominantly by prime, fixed-rate residential mortgages, but will issue fixed-rate notes. In the past, such deals have relied on interest rate swaps to offset the interest rate differential between the floating-rate notes and the predominantly fixed-rate mortgage loans. But a number of regulations have made it unattractive for banks to provide such arrangements.
Arena NHG 2014-I relies instead on an interest rate cap, in effect until April 2019, on the notes to be issued. So not only are payments on notes unlikely to rise above payments on the underlying loans; its also possible that the deal will generate excess spread if interest on the notes reached this cap and the interest on the underlying portfolio of loans continues to rise. "Where interest rates rise beyond the cap, and stay there for a long time, the assets pay significantly more interest than is required to pay on the notes," Fitch Ratings stated in its presale report.
After April 2019, the interest paid on the class A notes consists may rise above this threshold, but any amount above the threshold will be junior in priority, according to ratings agency reports.
"The main rationale for excluding a swap is the increasingly stringent Basel III and Solvency regulations," Matthijs van der Horst, head of debt syndicate at ABN AMRO, the sole lead arranger, said in a press release. "These lead to increasing costs resulting from liquidity and capital requirements, as well as increased volatility of potential collateral postings for these swaps.
"We believe the structure of this transaction may well become an industry benchmark," he said.
The deal offered investors offered three tranches rated 'AAA' by Fitch and 'Aaa' by Moody's Investors Service. All €685 million ($912 million) class A notes, which consisted of €119 million of fast-pay floating-rate class A1 Notes, €286 million of floating-rate class A2 notes and €280 million of fixed rate class A3 notes were placed with investors, rather than used as collateral in borrowing from the European Central Bank, according to ABN AMRO.
The bank said that deal had been marketed to "a select group of key investors."
Investor-placed Dutch RMBS issuance is €5 billion year to date, down 60% year over year, according to Standard & Poor's.
The class A1 notes with a weighted average life of 1.4 years priced at 33 basis points over three month Euribor; the class A2 notes with a weighted average life of 4.4 years priced at 63 basis points over three month Euribor; and the class A3 notes with a weighted average life of 4.7 years priced at mid swaps plus 73 basis points.
The deal is backed by prime Dutch residential mortgage loans acquired from Delta Lloyd Bank, a subsidiary of Delta Lloyd N.V.
Arena NHG 2014-I B.V. is the 15th securitization transaction undertaken by Delta Lloyd under the Arena program since 2000.
All of the loans backing the deal are fully guaranteed by the Dutch national mortgage guarantee scheme, Nationale Hypotheek Garantie. The pool of collateral has an average of 51.9 months of seasoning; an average balance of €162,100; and represents, on average, 87% of the original market value of the property being financed.