uk mortgages limited (ukml) - twenty four am · for institutional investors only/not for public...

For institutional investors only/not for public viewing or distribution

UK Mortgages Limited (UKML)

November 2016


Overview

2

UK Mortgages Limited Reintroduction

Progress To Date

Current Portfolio

Why Not Yet Fully Invested

Current Market Environment

Conclusions


UK Mortgages Limited (UKML) Re-introduction

3

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.


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

4


5


Progress To Date

Current Portfolio



Conclusions


Progress Review

6

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


NAV Volatility

7

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


8


Progress To Date

Current Portfolio



Conclusions


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

9

*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


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

10


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

11

*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


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

12


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*

13

*IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved.


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

14


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

15


Evolution of Yield

16

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.


17


Progress To Date

Current Portfolio



Conclusions


Deal Opportunities to Date

18

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


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

19


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

20


Deals We Turned Down

21

# 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


Why Not Fully Invested ?

22

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


23


Progress To Date

Current Portfolio



Conclusions


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

24


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

25


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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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.


Contact Details

TwentyFour Asset Management8th Floor

The Monument Building

11 Monument Street

London

EC3R 8AF

T: +44 (0)20 7015 8900

twentyfouram.com

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

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Add footnote


UKML - Structure

29

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.


ABS portfolio management team

30

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


Leadership in the asset class

31

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


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

securities described herein and may be amended, superseded or replaced by subsequent summaries. The final terms and conditions of the securities will be set out in full in the applicable offering document(s).

This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities described herein. TwentyFour is not acting as advisor or fiduciary. Accordingly you must independently determine, with your own

advisors, the appropriateness for you of the securities before investing. TwentyFour accepts no liability whatsoever for any consequential losses arising from the use of this document or reliance on the information contained herein.

No offers, sales, resales or delivery of the securities described herein or distribution of any offering material relating to such securities may be made in or from any jurisdiction except in circumstances which will result in compliance

with any applicable laws and regulations and which will not impose any obligation on TwentyFour or any of its affiliates.

TwentyFour does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party

sources. Any data on past performance, modelling or back-testing contained herein is no indication as to future performance and there can be no assurance that targeted or projected returns will be achieved, that the Company will

achieve comparable results or that the Company will be able to implement its investment strategy or achieve its investment objectives. No representation is made as to the reasonableness of the assumptions made within or the

accuracy or completeness of any modelling or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The value of any investment may fluctuate as a result of market changes. The

information in this document is not intended to predict actual results and no assurances are given with respect thereto.

TwentyFour, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in securities (or related derivatives) identical or similar to those described herein.

This document is being made available in the UK to persons who are investment professionals as defined in Article 19 of the FSMA 2000 (Financial Promotion Order) 2005. Outside of the UK, it is directed at persons who have

professional experience in matters relating to investments. Any investments to which this document relates will be entered into only with such persons. This document is not for distribution to retail customers.

No action has been made or will be taken that would permit a public offering of the securities described herein in any jurisdiction in which action for that purpose is required.

This document does not disclose all the risks and other significant issues related to an investment in the securities. Prior to transacting, potential investors should ensure that they fully understand the terms of the securities and any

applicable risks. This document is not a prospectus for any securities described herein. Investors should only subscribe for any securities described herein on the basis of information in the relevant prospectus (which has been or

will be published and may be obtained from TwentyFour by visiting it’s website www.Twentyfouram.Com), and not on the basis of any information provided herein.

TwentyFour Asset Management LLP is registered in England No. OC335015, and is authorised and regulated in the UK by the Financial Conduct Authority, FRN No. 481888. Registered Office: 8th Floor, The Monument Building, 11

Monument Street, London, EC3R 8AF. Copyright TwentyFour Asset Management LLP, 2016 (all rights reserved). This document is confidential, and no part of it may be reproduced, distributed or transmitted without the prior

written permission of TwentyFour.

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