Barclays/Kensington: ability to value complex mortgage risk gets a premium

The era of cheap money is ending. The property market shows signs of cooling. But the keen appetite of mortgage lenders has created fierce competition to buy UK specialist lender Kensington Mortgages from private equity owners Blackstone and Sixth Street. Winner Barclays will pay a hefty £2.3bn.

As a listed company in the noughties, Kensington was a subprime lender. But the company has evolved from the struggling business sold to South African bank Investec for £283mn in 2007. The private equity groups that bought it for over a third less in 2015 then nearly quadrupled its mortgage origination.

Kensington insists its borrowers are not especially risky, but merely complex to assess. It offers loans to the self-employed and contractors as well as buy-to-let landlords, which account for nearly a third of its portfolio.

Barclays has offered a premium on a £2bn portfolio of loans and a business that generates meagre profits. Its outlay will cost it a dozen basis points of common equity tier one capital, tiddly against its 13.8 per cent buffer.

Kensington’s average loan-to-value at origination is relatively high at 77 per cent, well over Barclays’ mortgage book at roughly half. Its 90-day arrears rate is about 2.5 per cent compared with 0.1 per cent for Barclays. But its credit record is good: only 19 of its loans have gone into default since 2010. Barclays clearly values Kensington’s proprietary software and ability to assess the quality of borrowers overlooked by high street lenders.

Barclays is not alone in taking an interest in specialist lending. HSBC wants a bigger share of the buy-to-let mortgages market. An intensely competitive mainstream mortgage market incentivises lenders to seek more lucrative niches. Barclays will expand into an unconventional part of the mortgage market late in the cycle. At least the deal is a small one — its shareholders will hope the long term rewards outweigh the risks.