Auburn Securities 4 plc

06OCT2004 --- AUBURN SECURITIES 4 PLC --- (launched 05-Oct)
CLASS A1: STG270M, FRN, AAA/Aaa/AAA, EAL 0.97YR, 1ML+12BPS
CLASS A2: STG597.5M, FRN, AAA/Aaa/AAA, EAL 4.25YRS, 1ML+20BPS
CLASS M : STG15M, FRN, AAA/Aa2/AAA, EAL 4.98YRS, 1ML+25BPS
CLASS B : STG40M, FRN, AA/Aa3/AA, EAL 4.98YRS, 1ML+35BPS
CLASS C : STG40M, FRN, A/A3/A, EAL 4.98YRS, 1ML+65BPS
CLASS D : STG25M, FRN, BBB/Baa3/BBB, EAL 4.98YRS, 1ML+105BPS
CLASS E : STG12.5M, FRN, BB/Ba2/BB, EAL 4.98YRS, 1ML+320BPS
COMMON TERMS: LFM 2041; CALL/STEP-UP OCT-09; IP 100; PAY 11-OCT LEADS BARCLAYS,
CITIGROUP AND MERRILL LYNCH.
--- DEAL INFO ---
After a break of nearly two years, Capital Home Loans, the specialist lender
which has been part of Irish Life and Permanent since 1996, comes back to the
market with its largest issue yet.
The Auburn series has, like the other buy-to-let programmes (Paragon, Aire
Valley), performed at least as well as prime UK rmbs, with lower delinquencies
and repossessions. This is based on a couple of factors: the financial
astuteness of the borrowers who are diversifying out of other forms of
investment and the underwriting methodology employed by the originators. This
last involves not just valuing the property, but also assessing the rental
income (at a minimum of 125pc of mortgage payments in the case of Auburn-4).
Additionally, to ensure that investment property remains a 'commercial'
enterprise, all borrowers must be existing homeowners.
Auburn-4 arguably has one of the weaker pools in the series, with average
LTV higher than Auburn-3 (80.6pc vs. 73.7pc) and a large 63pc of loans in the
80-90pc bracket. Average loan size is Stg121k and London/SE concentration runs
at 57pc, not surprising given the demand for rental property in the region, but
increasing the exposure to those areas which are expected to suffer most in a
housing price downturn. Self-certified loans account for 63.5pc of the pool,
though as the mortgage is based as much on the assessment of rental income as
that of the borrower this may not be a relevant indicator, and in any case low
documentation loans in prime rmbs have proven to have better performance than
conventional loans due to the lower LTVs allowed by the underwriters.
Last month saw the huge Stg2bn Aire Valley buy-to-let deal for Bradford and
Bingley which, despite its size, managed to bring the spread against prime rmbs
down to the 3-4bps level. Its pool statistics were slightly more attractive than
Auburn's, LTV running at 75pc and seasoning at 18 months. Market levels have
edged in marginally since then, generic 5yr AAA rmbs trading at the 15bps mark,
so Auburn's identical +20bps print is spot on Aire Valley's showing for its
longer 6.7yr notes, given Auburn's slightly more aggressive pool.
Further down the credit curve, the AA notes come 5bps through Aire's (and
2.5bps through price talk), and, remarkably, flat to Granite's tranche from mid-
September. At the single-A level, a more normal relationship applies, coming
20bps wide of Granite - Paragon's last offering (June) had a 28bp differential
at launch. Both the single-A and BBB notes printed 5bps wide of preliminary
guidance, though given the outturn on the AA and split-rated AAA/Aa2 (guidance:
high 20s) tranches you can't blame them for trying.
Auburn-4, denominated solely in Sterling, adds to the supply from Aire
Valley, and comes a fortnight or so before Paragon, the most frequent BTL
issuer, is due with its Stg850m offering (spread over three currencies). It
contains more Sterling notes than either, but despite not trying to appeal to a
wider audience, has managed to get a good result.