UK Asset-backed Securities Guarantee Scheme

The Credit Guarantee Scheme itself was one component of a three-part package including a bank recapitalization program and the extension of a liquidity scheme.

This authority allowed for the establishment of the Scheme without the need for additional legislation.

UK authorities notified the European Commission of the Scheme on April 17, 2009, and received approval on April 21, 2009.

Program documents did not provide a specific rationale for this amount.

Institutions eligible to participate in the Credit Guarantee Scheme were also eligible to participate in this Scheme and were required to use the pro forma application form available on the UK Debt Management Office website. When the British government introduced the Credit Guarantee Scheme as part of the October 8, 2008, package of stabilization measures, it made eight major institutions^FNAbbey National, Barclays, HBOS, HSBC Bank, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered. automatically eligible for participation “in recognition of their commitment to strengthen their aggregate capital position” by a collective £25 billion in Tier 1 capital pursuant to the Bank Recapitalisation Fund that was also part of the package. Other UK deposit-takers (including UK-incorporated subsidiaries of foreign institutions) and building societies could apply to be eligible, with eligibility contingent on a determination by HM Treasury that the applicant possessed sufficient Tier 1 capital. Applicants would also have their roles in the UK banking system and overall economy evaluated.

The list of eligible institutions in the Scheme was narrower (limited to deposit takers and building societies) than recommended by the Crosby Report, which included not only banks and building societies but also specialist lenders (Crosby Final 2008; Rules 2009).

Only one entity within a corporate group was allowed to participate in the Scheme, but issuances of RMBS under the Scheme could be made either by the participating institution or by its sponsored affiliated entities (Market Notice 2009).

When the Scheme was first announced, eligible securities to be guaranteed under the Scheme were RMBS, but the UK government also stated that HM Treasury would keep the scope of the Scheme “under review.” However, there was no extension of the Scheme beyond RMBS (Market Notice 2009).

Eligible RMBS under the Scheme were required to be:

• issued under a master trust existing at April 22, 2009, the aggregate principal amount of the proposed issue of Eligible Securities not exceeding the Capped Amount^FN“Capped Amount” means the aggregate principal amount of eligible securities which could be issued if they were backed exclusively by the Proposed Pool in a stand-alone transaction; “Proposed Pool” means the pool of eligible mortgages which is proposed to be sold by the eligible institution to the master trust to back the proposed issue of eligible securities.;
• denominated in a single currency of Sterling, Euro, US Dollars, Australian Dollars, Canadian Dollars, Swiss Francs, Yen, or such other currency as approved by HM Treasury;
• rated AAA or the equivalent at the time of issue by at least two international credit rating agencies, disregarding the availability of the applicable guarantee; and
• admitted to the official list of the relevant competent authority or stock exchange (as the case may be) and admitted to trading on the regulated market of the London, Dublin, or Luxembourg stock exchanges. (Rule 2009)

Furthermore, any mortgages contained in the underlying mortgage pool of the eligible RMBS were required to meet additional requirements:

• each mortgage loan must have been originated on or after January 1, 2008;
• each mortgage loan must have been secured by a valid first-ranking mortgage, or (in Scotland) standard security, over a residential property located in the United Kingdom;
• the current balance of each mortgage loan could not exceed £500,000;
• LTV ratio of each mortgage at origination could not exceed 90% of the lower of the purchase price or the then most recent valuation of the mortgaged property;
• the weighted average LTV ratio of all the mortgage loans in the underlying pool could not exceed 75% of the lower of the respective purchase prices of the mortgaged properties or the most recent valuations as at the time of origination;
• at least one full payment in respect of each mortgage loan must have been made;
• no amount of principal or interest in respect of each mortgage loan can have been in arrears at any time prior to the date of sale referred to above; and
• each borrower of each mortgage loan:
  • must have been a natural person;
  • must have satisfied the lending criteria that would be applied by a reasonable and prudent mortgage lender;
  • must not have been a “self-certified” borrower (but this does not refer to “fast-track” credit underwriting procedures); and
  • must not have had an adverse credit history. (Rule 2009)

There were two types of guarantees available under the Scheme. The first type was the credit guarantee, which ensured the timely payment of all amounts of interest and principal payable in respect of the eligible RMBS. The second type was the liquidity guarantee, which ensured that if an issuer failed to honor its obligation to purchase the eligible RMBS following an exercise of a put or call option under the terms of the eligible RMBS, then HM Treasury purchased such RMBS from the holder. An eligible RMBS under the Scheme could only benefit from either a credit guarantee or a liquidity guarantee (Market Notice 2009).

A participating institution’s group could not have more than one third of the total guaranteed eligible RMBS with a five-year term. The government does not appear to have established minimum maturity requirements for eligible debt.

Additional currencies could be made eligible via a determination by HM Treasury.

Program documents did not contain language limiting the amount of an individual institution’s participation in the program.

To participate in the Scheme, the participating institution had to pay a fee to HM Treasury in an amount equal to 25 basis points over its median five-year CDS spread during the period from July 2, 2007, to July 1, 2008, as determined by HM Treasury, and HM Treasury could charge an incremental fee in respect of guarantees of non-sterling denominated eligible RMBS (Market Notice 2009). This approach mirrored the fee structure for the Credit Guarantee Scheme, which imposed a fee of 50 basis points over the median five-year CDS spread.

The disclosure in these periodic reports was to be in line with international best practice such as the “RMBS Issuer Principles for Transparency and Disclosure, Version 1” published by the European Securitisation Forum in February 2009 (Market Notice 2009).

Guarantees were originally to be provided to eligible RMBS issued within six months from the start of the Scheme, subject to any extension at the discretion of HM Treasury. HM Treasury subsequently extended the issuance window of the Scheme up to December 31, 2009 (EU 2009, Market Notice October 2009).