UK MORTGAGES LIMITED
(a closed-ended investment company incorporated in Guernsey with
registration number 60440)
LEI
549300388LT7VTHCIT59
Final Net Asset Value
FUND NAME |
NAV |
ISIN |
NAV DATE |
UK Mortgages
Limited |
£0.8059 |
GG00BXDZMK63 |
30th June 2020 |
UKML RNS: Commentary accompanying UK
Mortgages Limited June 2020 NAV
The UKML NAV per share was calculated for June 2020 month end at 80.59 pence per share, an increase of
1.17 pence per share.
The Company’s investments continue to perform in line with
current expectations, with the number of loans taking a payment
holiday reducing further as more borrowers come to the end of their
initial 3 month deferral period. More details on these will be
available in the factsheet due to be published shortly.
Alongside the regular monthly income generated by the Company’s
investments, the key drivers for the movement in the NAV for this
period are the semi-annual recalculations of both the hedge
effectiveness calculations and the updated IFRS 9 Expected Credit
Loss (ECL) provisioning assessment.
Hedge Effectiveness:
As highlighted in NAV commentaries throughout 2020, consistently
falling swap rates have so far had a negative impact on the monthly
valuation levels of the interest rate swaps held in the portfolios.
This, in turn, has had an ongoing negative impact on the NAV as the
Company is exposed to the portion of the swap movement deemed
ineffective under IFRS 9 accounting standards.
The effectiveness of the Company’s hedges are independently
re-calculated each half year under current accounting policy, as
referenced above. Furthermore, the Company’s forward flow
portfolios have grown by almost £200m since the last calculation,
increasing the value and number of hedges in place, whilst the
previous hedge effectiveness parameters remained unchanged. The
latest hedge effectiveness tests for June
2020 month end NAV showed improved effectiveness, thus
resulting in a positive adjustment to NAV performance.
Oat Hill No1:
June was the first full month to capture the step-up in the
senior note interest on the subsequently called Oat Hill No. 1
transaction, post the first optional call date in May, which
resulted in a slightly higher cost of funding for the month.
IFRS 9 ECL Provisioning:
The Company’s factsheet for April
2020 included a high level estimate of the impact of payment
holidays on the provision for expected credit losses under IFRS 9.
The early payment holiday data available at that time showed an
increased total stressed-case provision of £1.8m. Subsequently, as
the payment holiday population has evolved, and with more granular
data also becoming available, the high level model has been
significantly refined following an extensive process with the
Company’s auditors. The model now includes loan-by-loan analysis of
each portfolio, capturing both initial payment holiday and ensuing
extension data, employing a scaled probability of default analysis
for each portfolio, coupled with stressed asset value decline
assumptions, and also featuring LTV tiering plus distressed sale
and interest shortfall haircuts. This has resulted in a £1.1m ECL
provision – £0.7m less than that indicated previously.
The positive movement from the hedge effectiveness calculations
was partially offset by the increase in the IFRS 9 ECL
provisioning, with the net effect of these two components
contributing approximately 1.00 pence
of the increase in the NAV (albeit investors should be aware that
both of these figures remain subject to final audit).
Amortised Cost vs Fair Value
Accounting Methodology
Amortised cost basis of accounting is a widely used methodology
for valuing less liquid debt assets, where transparent pricing is
not regularly and easily available (such as might be the case in a
regularly traded bond market), and particularly where the assets
are intended to be held to maturity. Financial institutions, such
as banks and other independent lenders, typically adopt this method
for the valuation of portfolios of longer-term loans such as
mortgages. The methodology allows any purchase discount/premium to
be released into the valuation over the life of the asset
portfolio.
Fair value accounting is more typically applied to assets, which
have a higher degree of market price transparency, such as exchange
traded and over the counter debt instruments, where regular
transactions in such instruments or comparable instruments take
place.
The fair valuation of a mortgage portfolio is a highly complex
process, with numerous inputs, particularly for older portfolios
where the most recently available credit analysis of the borrowers
and asset valuations, may be significantly outdated. As such, the
fair valuation of mortgage portfolios would typically be based on
the expected funding cost in public or private markets, using
securitisation modelling with a number of cashflow and stress
assumptions applied, tailored to each portfolio’s characteristics.
Simplistically, when the funding cost of a securitisation is
higher, the fair value of the portfolio will be lower and
vice-versa.
The Company adopted amortised cost accounting methodology, given
its widely used application for portfolios of mortgages in the
banking sector and the Company’s intention to hold the portfolios
to maturity.
Regardless of this, the fair valuation of the Company’s
portfolios are carried out by an independent third party on a
semi-annual basis using the above methodology with the quantum
disclosed in the interim and year-end financial accounts for IFRS
disclosure purposes. However, the above methodology assumes a
single point in time valuation and therefore funding cost, whereas
the Company’s portfolios are typically all term-funded for various
tenors (e.g. 3 years for securitisations or 2 years for
warehouses), each of which have staggered maturity dates, and so
somewhat protecting the fund from the variability in funding costs
over time. Therefore, whilst the fair valuations of the portfolios
may introduce some volatility, the amortised cost valuation
provides a smoother unwind of discount/premium over the life of the
portfolios.
That said, it’s important to recognise the difference in the
valuation of the Company’s portfolios between the two approaches,
where typically the fair valuation has been meaningfully higher
than the amortised cost. The table below, simplistically, shows the
difference in the NAV between the two methodologies over the last
two years, assuming all else remains the same.
Date |
NAV (Amortised cost) |
NAV (Fair Value) |
Dec-18 |
83.65 |
94.54 |
Jun-19 |
82.06 |
99.79 |
Dec-19 |
81.06 |
100.38 |
Jun-20 |
80.59 |
94.95 |
More detail on the market and portfolios will be available in
the factsheet due to be published shortly.
Enquiries:
Northern Trust International Fund Administration Services
(Guernsey) Limited
Andrew Bonham
44 (0)1481 745302