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For institutional investors only/not for public viewing or distribution
UK Mortgages Limited (UKML)
November 2016
For institutional investors only/not for public viewing or distribution
Overview
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UK Mortgages Limited Reintroduction
Progress To Date
Current Portfolio
Why Not Yet Fully Invested
Current Market Environment
Conclusions
For institutional investors only/not for public viewing or distribution
UK Mortgages Limited (UKML) Re-introduction
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UKML launched in July 2015 to invest in portfolios of UK mortgages
UK mortgage lending has demonstrated very low levels of risk
- Proven resilience throughout economic cycles
UKML will enhance returns through the issuance of senior securitised debt
- Whilst retaining the ongoing equity interest in the leveraged portfolio
Target returns 7-10% pa*, fully distributing
* Target returns only and not a profit forecast. There can be no assurance that these targets will be met and they should not be taken as an indication of expected or actual current or future results.
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UKML – Strategy Review
Investment strategy
- Broad diversification across the UK housing market
- Excellent historical loss and arrears performance
- Blend of mortgage types: owner-occupied and Buy-to-Let
- Significant diversification, expectation of c.8,000-10,000 mortgages once initial capital invested
Financing strategy
- Portfolio purchases financed initially via third party warehouse and fund capital
- Long term financing via rated senior securitisation issuance
- UKML retains the junior portion
Returns
- Estimated net spread (after senior financing, losses and arrears) of 1%-2%
- Use of leverage creates 7-10% gross total return target (at 4-7 x leverage)
- Uncorrelated with the broader market
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For institutional investors only/not for public viewing or distribution
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UK Mortgages Limited Reintroduction
Progress To Date
Current Portfolio
Why Not Yet Fully Invested
Current Market Environment
Conclusions
For institutional investors only/not for public viewing or distribution
Progress Review
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Establish UKML as a serious investor in the UK mortgage arena P
Establish UKML in the UK securitisation market for low cost financing P
Review and participate in the sale of secondary mortgage portfolios P
Establish an ongoing primary mortgages origination platform relationship P
Fully invest and then leverage UKML to achieve target returns O
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NAV Volatility
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Effects of the swap MTM will unwind over time
- Approx. 80% of Malt Hill No.1 loans will reset in Q2/Q3 2017 when the associated swaps will closeout
NAV to Financial Year-end July-2016
Start NAV 98
Net Interest 1.6
Dividend (1.5)
Costs (Servicing, Operating, Warehouse) (1.6)
Swap Mark-to-Market (1.6)
Fund NAV (Jul-2016) 94.9
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UK Mortgages Limited Reintroduction
Progress To Date
Current Portfolio
Why Not Yet Fully Invested
Current Market Environment
Conclusions
For institutional investors only/not for public viewing or distribution
Current Portfolio Top Down
A complementary blend of products with an overall IRR comfortably within expectations
We have a healthy pipeline of follow-on opportunities
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*IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved.
Trade Size Origination Product TypeCapital Usage IRR*
1 £310m Building SocietyLow-LTV
Buy-to-LetSecondary Portfolio
£51.6m 7.35%
2 £250m Specialist LenderOwner-
Occupied
New Primary
Originator£72.5m 9.49%
31 £400m+ Specialist Lender Buy-to-LetExisting Primary
OriginatorRemainder c.8%+
1) This transaction is in the final stages of negotiation and is not yet complete
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Trade 1: Coventry Building Society/Malt Hill No.1
Our first portfolio was a secondary market private purchase completed in November 2015
- Discussions initiated in summer 2015
- Extensive credit analysis and modelling undertaken
- A high-quality pool of c.£310m non-member Buy-to-Let mortgages originated by Coventry BS
- One of the most conservative lending institutions in the UK
- Performance since purchase has been near-perfect
- 1,743 loans with an average loan-to-value of 65%
- Primarily originated during Q2 2015
- Initially financed by a warehouse facility with Bank of America Merrill Lynch
- Subsequently re-financed via securitisation term-out
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Trade 1: Coventry Building Society/Malt Hill No.1
Debut securitisation documentation and rating processes commenced following purchase
- Also included BoE and ECB eligibility conformity and PCS label certification
Bond investor education and marketing exercise for UKML and its debut issuance undertaken in Q1 2016
Poor market conditions at end-Q1 meant short term securitisation pricing became less attractive
Waited to securitise until June 2016 – Malt Hill No. 1
- £263.3m of Aaa/AAA1 rated bonds sold at 3m LIBOR + 135bps
- 6.8x leverage
Initial expected IRR on capital deployed of 7.35% gross*
Annual re-evaluation of asset performance and expected refinancing rates to be conducted shortly
- Should lead to IRR uplift
Strong ongoing working relationship with Coventry BS – which could lead to further future transactions
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*IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved. 1) Moody’s/Fitch
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Trade 2: The Mortgage Lender (TML)
Our second transaction announced in July 2016 gave UKML access to primary origination
- UKML will purchase owner-occupied mortgage loans on an ongoing basis from TML
- New business from a highly experienced team who set up and ran Mortgages PLC for over 10yrs
- Opportunity to form partnership at grassroots level
- Tailored product to optimise portfolio mix for UKML
- Attractive pricing
- Highly flexible arrangement
- Therefore ideally suited to the long-term viability of the UKML product
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Trade 2: The Mortgage Lender (TML)
Initial commitment for £250m of geographically diversified loans
- Loans to be originated over a 12-14 month period
- Additional funding provided via RBS warehouse facility
First loan completions in September 2016 with pipeline now over £25m, in line with expectations
Transaction will deploy c.31% of initial capital in the 12-14 months ramp-up
- Capacity to use more capital going forward
- Ongoing discussions over new product lines
- Initial expected IRR on capital deployed of 9.49% gross*
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*IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved.
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Benefits of Primary Origination
Ability to tailor the mortgage origination to suit UKML’s risk profile
Portfolios can be optimised to fit securitisation models thereby enhancing returns
Ability to access specialist sectors of the mortgage market where yields are higher without necessarily
taking on more risk
Direct access to product without third parties diluting the yield
The pace of origination can be controlled to suit ongoing free capital and to grow the fund, thereby
keeping UKML as close to fully invested as can be
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Trade 3: New Trade
A third transaction is in the final stages of negotiation
Upon completion, it will deploy the remainder of the fund’s investable capital
We were hoping to announce this to the market along with today’s presentation, but it is not quite ready
yet
Full details expected to be released as soon as possible, however the economic impact of the transaction
has been modelled and is included for reference
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Evolution of Yield
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
UKML - Projected Annualised Return from Initial 3 Transactions
Coventry TML Trade 3
Securitisation of TML & Trade 3
Refinances of TML & Trade 3 Base
Dividend
Refinances of Malt Hill
Please note: Returns for Trade 3 are modelled based on unfinalised transaction terms. There can be no assurance that models will represent the final portfolio and therefore actual returns may differ.
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UK Mortgages Limited Reintroduction
Progress To Date
Current Portfolio
Why Not Yet Fully Invested
Current Market Environment
Conclusions
For institutional investors only/not for public viewing or distribution
Deal Opportunities to Date
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Deals
Purchased and securitised – Coventry/Malt Hill No.1 1
Primary origination agreement and lending in progress – TML 1
Transaction terms being finalised – Trade 3 1
Currently being analysed 3
Long term prospects 4
On Hold 3
Seller withdrew 1
Turned down following initial analysis 7
Lost to competition/market 3
Total 24
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Deal Challenges
Mortgage pools are long-term illiquid assets – need to ensure suitability for the interests of the fund
Negotiations are complex, often protracted and involve time-consuming analysis including
- Credit analysis
- Modelling
- Pricing
- Negotiations, often with multiple parties, of documentation and operational terms
- Third party financing
Becomes expensive once law firms and other external advisors are engaged, hence the vast majority of
work is completed in-house with 5 ABS team members dedicated to UKML
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Headwinds
Deal negotiations often present unforeseen challenges and are dependent on a number of factors
- Competition from other buyers
- Poor market conditions in early-2016
- Uncertainty leading up to and following Brexit vote
- Subsequent monetary policy stimulus
- Changes to Buy-to-Let tax and regulations
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Deals We Turned Down
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# Date Size (m)Legacy Assets? Credit Pricing Data Compatibility Complexity
1 Jan-16 £100+ PN-CArrearsForbearance LTV >100%
2 Jan-16 £275 P N-CRe-performingloans
Unknown prior arrears
Multiple originators
3 Feb-16 £100 P N-C
4 Mar-16 £2,000 P BTLCouldn’t agree price
5 Mar-16 £800 P N-CHistoric performancenot supplied
6 Mar-16Future Flow
O N-CSeller’s strategy not compatible with UKML
7 Jun-16 £280 P N-CBrexit counterparty withdrawal
N-C = Non-Conforming, BTL = Buy-to-Let
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Why Not Fully Invested ?
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The bottom line is that this is a very longterm product, therefore the team havebeen highly selective and stronglyfocussed on relative value, causing thedelay seen in capital deployment todate.
In the medium term the benefits of thisapproach will be very clear
For institutional investors only/not for public viewing or distribution
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UK Mortgages Limited Reintroduction
Progress To Date
Current Portfolio
Why Not Yet Fully Invested
Current Market Environment
Conclusions
For institutional investors only/not for public viewing or distribution
Financing – Current Securitisation Market
Monetary stimulus has had a positive effect on spreads in securitisation markets
The cost of securitisation is now cheaper than at any time since 2007
Demand for highly-rated floating-rate assets is strong as a broader investor base seeks safe low-volatility
returns
Lower expected issuance from UK banks due to the BoE’s new Term Funding Scheme has opened the
door much wider for non-bank lenders
Pricing is expected to remain tight
UKML’s product range fits perfectly into this space
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Current Mortgage Market
Primary market drivers are the cost and availability of mortgages alongside the housing market
Supply of credit is steady – banks remain open for business
Base-rate cuts are being passed on to borrowers
But….
Ongoing regulatory changes are making underwriting criteria more stringent
No significant downturn in house prices seen since the EU Referendum
Demand for housing in the UK remains strong
Substantial housing growth required for the foreseeable future
But….
Significant uncertainty remains over Brexit outcome – wait and see attitude from buyers
Further challenges for Buy-to-Let with tax and lending criteria changes
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Future Growth
Fully investing the current fund remains our number one priority and we hope to achieve this very soon,
resulting in a rapid ramp up in cash flows that can be used for dividends
Once fully invested, future growth will be highly targeted
UKML is now an established player in the mortgage market meaning that future deals can be progressed
to transaction point without requiring capital in situ
UKML could raise matching capital once transactions are agreed and deploy cash with a month
Alternatively, future growth can be satisfied via the primary (future flow) products
The benefits of future growth would be:
A larger more liquid fund with reduced TER
More diversification of borrower, mortgage type, risk profile and maturity profile
Smoothing of the yield through diversity of product and number of securitisations
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For institutional investors only/not for public viewing or distribution
Conclusions
UKML is now an established player in both the primary and secondary markets for UK mortgages
TwentyFour has heavily invested in the product and the platform to ensure the fund’s investment
objectives are met consistently through time
The longer term prospects for UKML are at least as good as we had envisaged at the onset of the fund
Against a backdrop of falling fixed income yields, we continue to believe that the expected returns* on
the fund can still be achieved and may be enhanced by improved funding costs
Delays to full investment have been frustrating but are almost over
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* Target returns only and not a profit forecast. There can be no assurance that these targets will be met and they should not be taken as an indication of expected or actual current or future results.
For institutional investors only/not for public viewing or distribution
Contact Details
TwentyFour Asset Management8th Floor
The Monument Building
11 Monument Street
London
EC3R 8AF
T: +44 (0)20 7015 8900
twentyfouram.com
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Add footnote
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UKML - Structure
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Guernsey company with shares quoted on LSE Specialist Funds Market, with intention to move to the Main Market
- Monthly NAV, calculated on expected loan performance, approach agreed with PWC
Target returns*
- Quarterly dividend of 1.5p after initial investment period, with full year “top up”
- 7-10% NAV total return with low volatility
Investment policy
- Diversified portfolio of UK residential mortgages
- Initial portfolio of secondary market transactions
- Primary origination mechanism also in place
- Financing obtained initially by bank facility, before fully securitised term structure put in place
Fees and expenses:
- Management fee of 0.75% of lower of NAV and Market Cap
- Total expenses of 1.2% per annum of NAV
- No management fees on un-deployed IPO proceeds after 6 months
* Target returns only and not a profit forecast. There can be no assurance that these will be met and they should not be taken as an indication of expected or actual current or future results.
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ABS portfolio management team
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Ben Hayward, Founding Partner18 years RMBS experience across
portfolio management, modelling and analytics
Rob Ford, Founding Partner29 years RMBS experience across trading, securitisation, portfolio
management
Aza Teeuwen, Partner & Portfolio Manager
9 years RMBS experience across portfolio management and analytics for
mezzanine structured finance
Dawn Kendall, Partner & Portfolio Manager
29 years experience in the investment industry across a variety of senior roles
in asset management and banking
John Lawler, Portfolio Manager30 years’ ABS experience, and was
previously a Managing Director at three Global Investment Banks.
Doug Charleston, Portfolio Manager9 years experience structuring,
managing and rating mortgage-backed securitisations
Silvia Piva, Portfolio Manager9 years experience structuring and
managing asset-backed securitisations
Shilpa Pathak Develops system architecture, models
mortgage securities
Luca BeldiModels mortgage securities, builds
stress tests
Elena RinaldiModels mortgage securities, builds
stress tests
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Leadership in the asset class
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1 Association for Financial Markets in Europe2 HM Treasury
Experienced senior team
- Rob Ford helped Barclays issue its first mortgage securitisation back in 1989 before going on to head up thetrading unit at Europe’s leading securitisation house
- Ben Hayward managed Europe’s largest ABS funds prior to joining TwentyFour
- Aza Teeuwen has 10 years experience managing European ABS in IG and non-IG from IMC
- John Lawler previously served as Head of European ABS distribution at Nomura as well as experience working atsome of the major banks within the ABS market such as Royal Bank of Scotland and Barclays
- Doug Charleston gained extensive experience structuring, managing and rating mortgage-backed securitisationswith Lloyds, Nationwide and S&P
- Silvia Piva spent 9 years originating and structuring ABS at RBS
- Additional support from 3 analysts, and a specific CLO manager research PM
Leadership in the sector
- Rob Ford is currently vice-chair of the AFME Securitisation Board and Executive Committee1
- Advisor to the Tri-Partite Securitisation Technical Group (FCA, BofE, HMT2)
- Member of the Bank of England Residential Property Forum
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TwentyFour Asset Management8th FloorThe Monument Building11 Monument StreetLondonEC3R 8AFT: +44 (0)20 7015 8900twentyfouram.com
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Disclaimer
This document has been prepared by TwentyFour Asset Management LLP ("TwentyFour"), portfolio manager of the Funds, for information purposes only. This document is an indicative summary of the terms and conditions of the
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