Buy to Let

Warning raised over securities linked to UK consumers

Moody’s has raised the alarm over a wide range of UK consumer loans that are bundled together and sold to institutional investors, underlining how anxiety over a deteriorating economic outlook is spilling into markets.

Auto loans, credit cards, buy-to-let mortgages and so-called “non-conforming” mortgages that do not meet high street lending standards were among those that make up asset backed securities and were singled out by the rating agency for a negative outlook.

“Rising levels of household indebtedness and a weaker macroeconomic environment are the key drivers behind our decision,” analysts at Moody’s said on Monday.

They pointed to a backdrop in which “higher inflation, weaker wage growth and levels of indebtedness leaves those in lower-income brackets the most exposed”.

The decision by Moody’s to cut the outlook on consumer-related debt instruments is a sign that worries over the economy are seeping into structured bond markets, which are closely linked to the performance of consumer credit.

The loans are packaged up and sold on as bonds in the capital markets, and typically bought by institutional investors, including pension funds and insurance companies, as well as banks.

The Bank of England, which gives its latest forecast for the economy on Thursday, has recently aired concerns over faster than expected levels of consumer credit growth in the UK, which has outpaced household income growth.

“The debt is increasing, but at this moment interest rates are remaining low, and that is softening the potential visibility of delinquency rise[s],” said Masako Oshima, an associate managing director in the structured finance group at Moody’s.

The rating agency suggested that auto loan delinquencies will rise slightly, though from a low base, due to weakness in the economy.

It added that Personal Contract Purchase plans have “encouraged higher debt levels and potentially allowed less creditworthy borrowers access to credit”, echoing wider concerns about high levels of debt to finance car purchases in the UK.

Last month, investors pointed to auto ABS as a “brewing risk” in the UK, especially for loans which often depend on future sales of used cars. Securitisation is a significant source of funding for the auto industry.

Moody’s did not change its outlook for prime residential mortgages, saying that market will remain “robust”, though it highlighted the sensitivity of the buy-to-let sector to changes in the economy.

While European securitisation markets have dwindled compared to their pre-crisis levels, activity has risen over recent months, according to data from the Association for Financial Markets in Europe.

Total placed volumes in the second quarter in Europe this year were €38.7bn, the highest quarterly totals since the fourth quarter of 2008, with sales of UK residential mortgage-backed securities driving issuance up.

Recently, more than £10bn of securities backed by a portfolio of Bradford & Bingley loans previously owned by the UK government were sold.

The UK government is preparing to sell off £5bn of additional mortgages by early next year, which could also be securitised by an eventual buyer.

Moody’s also said that macroeconomic disruption from Brexit negotiations could be significant, pointing to a “substantial probability that negotiations will fail and no agreement will be reached”.

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