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UK Mortgages Ltd - COVID-19 - RMBS, Mortgage Market and Fund Update

UK Mortgages Ltd: COVID-19 – Securitisation Market, Mortgage Market and Fund Update


27 March 2020

(a closed-ended investment company incorporated in Guernsey with registration number 60440)
LEI 549300388LT7VTHCIT59

COVID-19 – Securitisation Market, Mortgage Market and Fund Update

Since the Board and Portfolio Manager last updated investors in our interim financial statements published on 19th March, financial markets have continued to be extremely volatile as the Covid-19 pandemic has intensified. Spreads in RMBS and ABS markets have widened significantly and primary markets have essentially shut down.

Despite very recent rallies in equity markets and some similar signs in broader credit markets, ABS markets have widened and remain close to their lows, and with spreads at extreme levels new issuance is not likely to return in the near term, particularly from the banking sector where government/central bank funding schemes have given the banks almost unlimited amounts of extraordinarily cheap funding. Whilst this additional funding is likely to be positive for RMBS spreads in the medium term, as it was in 2016 when the first TFS scheme was created following the Brexit vote thereby almost eliminating the banks’ needs for capital markets funding, in the short term the effective shutdown of the country and its consequences for the economy remain the focus of attention and spreads are likely to remain at elevated levels.

As was mentioned in the Company’s interim financial statements, this means there is a significant possibility that a refinancing in the public markets of the Oat Hill No.1 transaction, which reaches its first refinancing date near the end of May, will not be possible given the relatively short timeframe for any recovery to take place and for those markets to reopen. For the avoidance of doubt the existing funding remains secure, as the current Oat Hill securitisation can remain outstanding, albeit at an increased cost, and this would still allow the Company to revisit the securitisation refinancing or a warehouse option in the future, as the deal is able to be refinanced on any future quarterly interest payment date.

As also mentioned, and with this in mind the portfolio managers have continued to explore alternative short-term solutions which would allow the securitisation plans to resume when market conditions improve. This might, for example, be in the form of a short-term warehousing facility with one or more banks to be entered on or about the May 2020 interest payment date of Oat Hill 1. However, given current market conditions, it is unlikely that such a solution will allow the mezzanine funding that had been planned for the securitisation, and therefore any capital release would be greatly reduced. In this case, any capital release would not be forthcoming until a public refinancing was subsequently completed.

The uncertainty over the timing and cost of future funding is mirrored by uncertainty in the mortgage market. Specifically, we do not know at this point how future cash flows will be affected by mortgage holidays or other forms of relief that will be offered to distressed borrowers. It is possible that direct government support to employees and now to the self-employed will be sufficient to maintain mortgage payments at, or close to, contracted levels.  At the very least, as this relief will take some time to implement, it does provide the backup to help them make up the forbearance measures once the crisis has abated.

With regard to future loan origination, it is reported that UK Finance and the UK banks are in discussions with the government on whether the mortgage/housing market itself can continue through the current shutdown. Despite the massive liquidity stimulus, banks and other lenders are removing mortgage products from their offerings and/or putting up mortgage rates. Physical property valuations are no longer possible due to the lockdown and the likelihood of any significant number of house purchases completing in the next few months has plummeted.

For loans in our pipeline, this means that other than those loans which are re-mortgages and are currently close to completing, most will likely be delayed. For purchases, those where contracts have already been exchanged may complete, but many may not, and many others are likely to be delayed. For the Company this will mean that loan growth will stagnate in short term, but with both the TML and Keystone portfolios having healthy balances of around £200m, and efficient leverage, they will continue to generate income for UKML during the shutdown. Our funding warehouses for these portfolios are long term and so will have ample opportunity to grow again, once lending restarts.

However, in the short term, the Board and the Portfolio Manager are revisiting the Company’s cash flow models to incorporate these unprecedented conditions. The principal concern will be the extent to which these models continue to justify paying an uncovered dividend in the near term, particularly if the intended refinancing of Oat Hill is delayed.

The Board intends to give a further update to shareholders next week.

Further information:

TwentyFour Asset Management LLP
Rob Ford
Douglas Charleston
020 7015 8900

Numis Securities Limited, Corporate Broker
Nathan Brown
Hugh Jonathan
020 7260 1000

Important notice

This announcement has been prepared for information purposes only, it is not a prospectus.

The distribution of this announcement in certain jurisdictions may be restricted by law. Persons into whose possession this announcement comes are required by the UKML, TwentyFour and Numis to inform themselves about, and to observe, such restrictions.

Certain statements in this announcement are forward-looking statements which are based on UKML’s expectations, intentions and projections regarding its future performance, anticipated events or trends and other matters that are not historical facts.  These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. TwentyFour's estimate of the potential gross IRR for this investment is calculated based on certain scenarios and subject to certain assumptions. This and any other references herein to potential future returns or distributions are targets and not forecasts and there can be no guarantee or assurance that they will be achieved.  Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements.  Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, UKML undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The information contained in this announcement is subject to change without notice and neither the UKML, TwentyFour nor Numis assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.

Recipients of this announcement who are considering acquiring New Shares in UKML are reminded that any such acquisition must be made only on the basis of the information contained in the Prospectus and any supplementary prospectus(es) thereto which may be different from the information contained in this announcement.  This announcement does not constitute or form part of and may not be construed as an offer to sell, or an invitation to purchase, investments of any description, nor as a recommendation regarding the possible offering or the provision of investment advice by any party.  No information in this announcement should be construed as providing financial, investment or other professional advice and each prospective investor should consult its own legal, business, tax and other advisers in evaluating any investment opportunity.  In particular, an investment in UKML involves a high degree of risk and prospective investors should read the section in the Prospectus entitled "Risk Factors" for further information.