Enquiries around publicly rated deals rise as lenders eye more diverse sources of funding

Enquiries into European bridging loan RMBS securitisations are on the rise, with industry sources anticipating the UK will develop into the leading market for new issuance. With the US market leading the way, a shift from private to public could open the asset class up to new investors.

“We’ve had a number of enquiries on the feasibility of doing bridging loan securitisations,” says Alastair Bigley, md and sector lead for European RMBS at S&P Global. 

Thus far, all European bridging loan issuance has been private. However, with the US making history earlier this year with the first publicly rated bridging loan securitisation, things could be set for a change on this side of the pond too.

“The US is the most established market and has the most esoteric, non-vanilla asset classes,” explains Bigley. “The fact a deal has been done in the US could signify that there is now a benchmark in place – and people often look to the US when it comes to figuring out what could be the next big thing in securitisation.”

While the UK market may be at the front of the line in terms of anticipated market action, the evolving bridging-loan-backed securitisation market is not just a UK phenomenon, but one that exists worldwide. Bigley explains: “Commercial banks across the continent will have an asset similar to this, but the market is likely bigger in the UK, probably because property speculation and development are more ingrained in the UK than they are in some continental European countries.”

Many forms of lending fall under the bridging loan umbrella. These include multiple different forms of loans for owner occupation, from chain breaking and fast purchase to even preventing repossession. Most recent annual figures show the UK’s bridging loan market sat at an estimated total of £7.6bn for 2023, with the average loan book at around £250m for each lender. 

“It’s just one of these markets that’s been hidden from public view,” says Bigley. “It’s not a new market per se. Property development and buying property at auctions has been around for decades, but it’s been funded directly on banks’ balance sheets – and now that’s changing a little bit. Many non-banks with different funding models are active in the bridging space, particularly in the UK.”

With active private markets in many jurisdictions, such as the Netherlands, UK and US, the bridging loan RMBS market now has a benchmark for the first time, following the issuance of the first publicly rated transaction in the US.

S&P estimates somewhere north of 50 lenders to be active in the bridging loan space in the UK. While many bridging lenders in the country still lack the scale to utilise securitisation as a means of increasing their funding diversity or securing potential pricing pickups, some of the larger ones do. 

“There’s all sorts of subtle reasons why it could be done – but I would expect for the larger lenders, diversification is the main objective here,” explains Bigley. “Bridging lenders can be funded in different ways, but the larger ones would likely be financed with a warehouse in a larger bank, which would in effect look like a securitisation. Smaller ones might be funded by family officers or directly by their equity investors.”

Therefore, while many bridging lenders are reportedly interested in increasing the diversity of their funding, only larger lenders have the scale to efficiently adopt securitisation technology as a means of securing this diversification. It also may not be too much of a stretch to get lenders equipped for investing in bridging loan RMBS, according to Bigley, as many participants are already involved in both spaces – including players like LendInvest.

“If you look at who the bridging lenders are, a lot of them are existing RMBS issuers,” explains Bigley. “So a lot of the bridging lenders are already familiar with securitisations. It’s one of those markets where the knowledge is already within these institutions to be able to do it.”

While the knowledge may already exist within the market, many barriers to entry remain – including structural challenges born out of the nature of bridging loans. “They are a very short duration asset,” says Bigley. “To overcome that in a  securitisation, you likely need to come up with some level of revolving feature – and how that is controlled is an additional issue.”

He continues: “The other element is that a lot of the underlying assets don’t pay interest on an ongoing basis – it’s rolled up as you go through the loan, rather than monthly as you would with a typical mortgage.”

Additionally, while bridging-loan-backed transactions may look similar to RMBS deals, trying to liquidate partially completed construction projects rather than standard residential homes is a different prospect. However, exactly how a ‘bridging loan’ is defined varies, and as the market grows Bigley expects it to continue to evolve. 

“The phrase ‘bridging loan’ means a lot of things to a lot of different people,” he says. “On one end of it is relatively straightforward residential lending – someone wanting to buy a property on the right street quicker than anyone else. On the opposite end of it, it could be something like an undeveloped plot of land that’s 50% complete with half a building on it.” 

However, despite the fact there is a sense of familiarity with the product amongst investors – who are likely to understand a transaction if it came in this form – much groundwork needs to be done before a public market is up and running in the UK.

Claudia Lewis