The European CMBS market gathered steam during the past 12 months, as banks tested investor demand with transactions which varied in both property type and geography.
The 13 securitisations launched in 2018 showed improved liquidity in the market, following a dormant 2017 in which only three such deals were issued, according to S&P Global Ratings.
With more players looking to invest in European CMBS, demand for the product, particularly in the middle and at the bottom of CMBS transaction capital structures, has increased, S&P said. However, the investor base appears to be thinner at the top end of the capital stack than at the bottom, the rating agency noted.
In the first half of 2018, note margins were noticeably lower than in 2017 – Kantoor Finance 2018, for instance, priced in June, saw its highest-rated tranche price at a recent low of 72 basis points. However, in Q3 2018, capital market volatility led to slightly less demand for CMBS and, consequently, wider note margins.
Although the European CMBS market is in better shape than in 2016 and 2017, market players note that a sustained comeback of securitised deals will depend on spreads remaining tightly priced and backed by robust investor demand. However, the universe of senior bond investors in Europe remains relatively small, said one issuer operating in that market who asked to remain unnamed.
“Until that universe expands, banks will be wary because pricing can be in the hands of a relatively small set of buyers,” the issuer said. “If, as we saw in the summer, multiple deals are in the market or relative value moves, then pricing can become unpredictable.”
Here is an overview of the CMBS deals closed in 2018:
Pietra Nera UNO: The first CMBS deal of this year, priced in February, was an agency transaction undertaken by Blackstone. Deutsche Bank, appointed to lead the deal, securitised circa €404 million of debt secured on four retail assets in Italy. The highest-rated tranche of notes was priced at 115 basis points.
FROSN 2018 DAC: For the first time ever, the European CMBS market had access to Finnish real estate through this securitisation of around €531 million. The deal, issued by Citi and Morgan Stanley, securitised a portion of the debt issued in December 2017 to finance Blackstone’s purchase of Finland’s Sponda property platform, secured against 63 office and retail properties. The highest-rated tranche of the CMBS deal achieved a price of 75bps in April.
Taurus 2018-1: In May, Bank of America Merrill Lynch priced its Taurus 2018-1 IT securitisation, sponsored by Blackstone and Partners Group, at 100bps over three-month Euribor for its highest-rated tranche. The deal securitised €300 million of debt backed by three loans secured on a portfolio of Italian logistic and retail assets.
Ribbon Finance 2018: In May, Goldman Sachs securitised debt backed by a portfolio of 20 Holiday Inn hotels in the UK in a circa €427 million CMBS deal. Its highest-rated note was priced at 78bps, while initial price thoughts were in the low 80bps range. Margins, at that point of the year, were tightening on the back of investor demand.
Kantoor Finance 2018: For its second European CMBS deal of 2018, Goldman Sachs offered bond investors access to the Netherlands office sector through a circa €248 million securitisation. The transaction, secured against two senior loans, had its AAA notes priced at 72bps in June.
Libra (European Loan Conduit 31): In July, Morgan Stanley closed this deal sponsored by MStar, the Starwood Capital and M7 Real Estate joint venture. The transaction securitised €221 million of the €282.5 million senior loan that refinanced a portfolio of light industrial and office assets in the Netherlands and Germany. Its highest-rated notes were priced at 75bps, which provided further proof that investor demand was keeping CMBS pricing low.
BAMS CMBS 2018-1: In July, Bank of America Merrill Lynch and Morgan Stanley closed a circa £300 million (€337.7 million) securitisation of a single £315.3 million loan backed by a portfolio of 59 urban logistics properties across the UK. The deal, sponsored by Blackstone, had its class A notes priced at 100bps.
Taurus 2012-2 UK DAC: In August, Bank of America Merrill Lynch securitised £261.5 million (€290.6 million) of a £275.3 million loan, including a £40 million capex facility, which was used to finance the acquisition of the Devonshire Square estate in the City of London. Pricing of the CMBS deal – with its A notes at 110bps – indicated CMBS spreads were widening, a trend which was seen across the wider structured finance market.
Elizabeth Finance 2018 DAC: Goldman Sachs closed in August a circa £91 million (€101 million) CMBS deal securitising two British senior commercial real estate loans with collateral comprising three shopping centres located in England and Scotland, and one campus-style office building in Manchester. The highest-rated tranche of the transaction was priced at 175bps.
Arrow CMBS DAC: Deutsche Bank and Société Générale in November closed the first post-crisis transaction with significant exposure to French commercial property. The CMBS deal securitised 95 percent of a €308.2 million senior loan backed by a logistics portfolio, with additional exposure to Germany and the Netherlands. The deal ‘A1’ tranche was priced at 110 basis points over three-month Euribor.
Oranje (European Loan Conduit 32): In November, Morgan Stanley priced a €202.3 million Dutch conduit secured against 78 properties, mainly offices. The deal’s highest-rated tranche was priced at 100bps.
Taurus 2018-3: Bank of America Merrill Lynch closed in December its third European CMBS of the year, a €475 million securitisation which was the first to feature German collateral since mid-2016. The transaction, with Blackstone as sponsor, securitised two office loans and its A notes were priced at 110bps.
Salus (European Loan Conduit No. 33): In December, Morgan Stanley arranged this deal backed by a £367.5 million (€418.5 million) senior loan secured against the 36-storey office CityPoint tower in the City of London, owned by Brookfield Asset Management. The highest-rated tranche of the transaction was priced at 150bps.