IBOR Transition for UK RMBS Portfolios
UK RMBS issuers and servicers
On the discontinuance of LIBOR, every floating rate mortgage and note in a residential mortgage-backed structure had to move to an alternative reference rate, and each required a spread adjustment because the replacement rates are economically different. ALP acted as independent adviser across the underlying mortgages, the notes and the hedging.
Scope of work
Reference rate selection, assessing candidate rates on liquidity, observability and ease of calculation with the trade-offs of each set out, supported by stress analysis of the pre- and post-transition position using historical correlation against LIBOR.
Spread adjustment calculated so the instrument stays economically equivalent through transition:
- An adjusted rate derived using an appropriate compounding methodology for the interest accrual period
- Spread adjustment computed at both loan and pool level to minimise value transfer
- Cash flow and NPV impact analysed with and without the adjustment
Basis risk quantified between the underlying mortgages and the notes where different reference rates apply to each, with the financial impact assessed for noteholders, an interim report issued for discussion and a final report produced for implementation.
Borrower treatment evidenced throughout the transition:
- Communications drafted by product type and maturity, explaining the change, the methodology and the likely financial effect
- Fair treatment of customers demonstrated through the approach taken
- The lender's legal right to change the benchmark considered alongside operational complexity for the portfolio holder
Rating agency and regulator engagement, supporting discussions on the impact of transition on the notes and assisting the client in presenting the analysis to the regulator where required.
Hedging advice and execution, analysing cost and benefit at note level, proposing hedges by type, duration and notional, identifying counterparties, developing term sheets, and negotiating execution price including capital and funding charges alongside CSA terms.
Outcome and value
- A documented basis for rate selection and spread adjustment across the portfolios.
- Basis risk quantified and hedged between mortgages and notes.
- Borrowers and noteholders informed with an explanation they could act on.
- One of the first major RMBS transitions to risk-free rates completed in the UK market.