First National Building Society is finalising terms for a £200 million securitisation, or sell-off, of loans on its £2.6 billion Irish mortgage book. The building society, whose members will vote next month on conversion into a publicly quoted company, is expected to complete this fundraising within weeks.

It will be First National's second securitisation issue and follows a £200 million issue in late 1996. Securitisation involves grouping together a number of mortgages and using them as security for raising long-term funding from investors on international money markets. The move releases funds tied up in mortgage loans for the society. The new funds can then be lent on to new mortgage borrowers. It allows the society to effectively recycle existing capital, increases its lending power and, because the society will continue to manage the portfolio loans for the investors, it will maintain its relationship with its customers.

The investors who advance funds to First National against the security of the mortgages are entitled to a stream of income from the mortgages which comes from the mortgage interest payments made by mortgage holders. The amount of income for the investors depends on the terms of the securitisation issue. Payment for investors is in the form of fixed or floating rate returns set at the time of the securitisation.

Securitisation is used by financial institution to diversify their sources of funds. Building societies fund much of their lending from short-term savings and deposits lodged with them and from wholesale money markets. With very strong demand for mortgage funds, societies are looking for different and cost-effective ways to raise the funds to lend on to mortgage borrowers.

First National is being advised by UK investment bank UBS which is handling the latest securitisation issue.

First National members will vote on May 18th on a proposal from the board that the society abandons its mutual status to become a publicly quoted bank. The move is aimed at ensuring that it has access to capital from equity markets to fund future growth and development.

If the conversion move is approved, some 220,000 First National members will get free shares when the society floats on the stock market. In the flotation which is expected to take place around October, each member will get an allocation of some 450 shares which will be worth a minimum of £1,170.