TwentyFour Asset Management
We engage with Santander as a debt issuer across many jurisdictions and various fixed income products, and we have had mixed views on the bank’s behaviour in recent years following a controversial approach to a 2018 AT1 refinancing and the exercise of an early call in a Spanish ABS deal in 2019. On both these occasions, we felt bondholders were treated poorly and this was reflected in our ESG analysis of the issuer.
Within the European ABS market, Santander is arguably the largest issuer and has been a frequent source of interesting opportunities. The lender issues ABS deals backed by mortgages, consumer debt and SME lending across the UK, Germany, Spain and Finland to name a few. Santander UK also operates one of the largest and most mature RMBS programmes, Holmes Master Issuer (Holmes).
Holmes is a revolving Mastertrust RMBS programme, which facilitates the issuance of bullet bonds (and in any currency) unlike typical amortising ABS deals. RMBS bonds like this typically appeal to a wider range of fixed income investors, such as money market funds, so they tend to attract the widest investor base and enjoy the best liquidity. US investors often find the relative value of USD denominated UK RMBS attractive versus US Agency RMBS.
Mastertrust structures are designed to create simpler RMBS bonds for investors, but are legally more complex and costly to maintain for Santander. Holmes can be updated or amended for both routine and material changes, for example in response to seismic market events like the current COVID-19 crisis.
Since the global financial crisis, Santander has amended Holmes many times, with changes to the size of reserve funds and credit enhancement, countless regulatory updates and even cleansing the pool of loans in arrears (moving them back onto the bank’s own balance sheet). Santander has adopted a position of responsibility as the sponsor of Holmes, and has often been an early issuer into uncertain markets, treading a path for price discovery for ABS investors. More recently, Santander was the first issuer to retro-fit its existing Libor bonds with a change to Sonia, absorbing the time and cost and allowing other banks to ride on its coat tails.
The COVID-19 crisis has seen retail banks like Santander charged with facilitating short term relief for consumer debt payments, most importantly through three-month mortgage payment holidays. We have written recently on how payment holidays do not pose a threat to RMBS credit quality; our analysis showed even in an unrealistic scenario whereby 100% of borrowers ask for relief, UK RMBS remains robust.
So it was a surprise when we saw a rapid communication from Santander announcing changes to Holmes, boosting protection for RMBS bondholders in the unlikely event payment holidays caused a shortfall in revenue to pay bond coupons. Firstly, Santander would use interest from loans in a larger mortgage pool not backing Holmes RMBS bonds to cover shortfalls, which essentially doubles the potential revenue available. Secondly, if this were to be insufficient, Santander flagged a willingness to grant a loan into the Holmes programme to cover further shortfalls in revenue.
It would be easy to be cynical here and suggest that as the existing protections are already robust for RMBS bondholders, it is virtually a free option for the issuer to give, but it again shows a strength and a commitment to the market from Santander and will help underpin the coveted AAA ratings all bonds within Holmes carry. It also sits well with bondholders like us, particularly as a positive contributor to the ESG component of our investment process.