UK Mortgages Limited (UKML) November 2016
Overview UK Mortgages Limited Reintroduction Progress To Date Current Portfolio Why Not Yet Fully Invested Current Market Environment Conclusions 2
UK Mortgages Limited (UKML) Re-introduction 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. 3
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
UK Mortgages Limited Reintroduction Progress To Date Current Portfolio Why Not Yet Fully Invested Current Market Environment Conclusions 5
Progress Review Establish UKML as a serious investor in the UK mortgage arena Establish UKML in the UK securitisation market for low cost financing Review and participate in the sale of secondary mortgage portfolios Establish an ongoing primary mortgages origination platform relationship Fully invest and then leverage UKML to achieve target returns P P P P O 6
NAV Volatility 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 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 close out 7
UK Mortgages Limited Reintroduction Progress To Date Current Portfolio Why Not Yet Fully Invested Current Market Environment Conclusions 8
Current Portfolio Top Down Trade Size Origination Product Type Capital Usage IRR * 1 310m Building Society Low-LTV Buy-to-Let Secondary Portfolio 51.6m 7.35% 2 250m Specialist Lender Owner- Occupied 3 1 400m+ Specialist Lender Buy-to-Let 1) This transaction is in the final stages of negotiation and is not yet complete New Primary Originator Existing Primary Originator 72.5m 9.49% Remainder c.8%+ A complementary blend of products with an overall IRR comfortably within expectations We have a healthy pipeline of follow-on opportunities *IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved. 9
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/AAA 1 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 *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 11
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* *IRR estimates based on modelled scenarios and calculated from trade inception. There can be no guarantee or assurance that they will be achieved. 13
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 18% UKML - Projected Annualised Return from Initial 3 Transactions 16% 14% 12% Securitisation of TML & Trade 3 10% 8% Refinances of TML & Trade 3 Base Dividend 6% 4% Refinances of Malt Hill 2% 0% Coventry TML Trade 3 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. 16
UK Mortgages Limited Reintroduction Progress To Date Current Portfolio Why Not Yet Fully Invested Current Market Environment Conclusions 17
Deal Opportunities to Date 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 18
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 inearly-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 # Date Size (m) 1 Jan-16 100+ PN-C 2 Jan-16 275 P N-C 3 Feb-16 100 P N-C Legacy Assets? Credit Pricing Data Compatibility Complexity Arrears Forbearance LTV >100% Reperforming loans Unknown prior arrears Multiple originators 4 Mar-16 2,000 P BTL 5 Mar-16 800 P N-C 6 Mar-16 Future Flow O N-C 7 Jun-16 280 P N-C Couldn t agree price Historic performance not supplied Seller s strategy not compatible with UKML Brexit counterparty withdrawal N-C = Non-Conforming, BTL = Buy-to-Let 21
Why Not Fully Invested? The bottom line is that this is a very long term product, therefore the team have been highly selective and strongly focussed on relative value, causing the delay seen in capital deployment to date. In the medium term the benefits of this approach will be very clear 22
UK Mortgages Limited Reintroduction Progress To Date Current Portfolio Why Not Yet Fully Invested Current Market Environment Conclusions 23
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 26
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 * 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. 27
Contact Details TwentyFour Asset Management 8th Floor The Monument Building 11 Monument Street London EC3R 8AF T: +44 (0)20 7015 8900 twentyfouram.com sales@twentyfouram.com John.Magrath@twentyfouram.com Alistair.Wilson@twentyfouram.com Sophia.Papi@twentyfouram.com Bryan.Bushnell@twentyfouram.com Add footnote 28
UKML - Structure 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. 29
ABS portfolio management team Ben Hayward, Founding Partner 18 years RMBS experience across portfolio management, modelling and analytics Doug Charleston, Portfolio Manager 9 years experience structuring, managing and rating mortgage-backed securitisations Rob Ford, Founding Partner 29 years RMBS experience across trading, securitisation, portfolio management Silvia Piva, Portfolio Manager 9 years experience structuring and managing asset-backed securitisations 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 Shilpa Pathak Develops system architecture, models mortgage securities Luca Beldi Models mortgage securities, builds stress tests John Lawler, Portfolio Manager 30 years ABS experience, and was previously a Managing Director at three Global Investment Banks. Elena Rinaldi Models mortgage securities, builds stress tests 30
Leadership in the asset class Experienced senior team - Rob Ford helped Barclays issue its first mortgage securitisation back in 1989 before going on to head up the trading 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 at some 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 securitisations with 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 Committee 1 - Advisor to the Tri-Partite Securitisation Technical Group (FCA, BofE, HMT 2 ) - Member of the Bank of England Residential Property Forum 1 Association for Financial Markets in Europe 2 HM Treasury 31
TwentyFour Asset Management 8th Floor The Monument Building 11 Monument Street London EC3R 8AF T: +44 (0)20 7015 8900 twentyfouram.com 32
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. 33