Is European CMBS back from the dead?

Last week, Bank of America Merrill Lynch (BAML) applied the paddles to the flat-lining European CMBS market. The investment bank launched a deal which has the potential to get the blood pumping around Europe’s commercial mortgage securitisation market once again. There haven’t been many signs of life since last September, when volatility in the capital […]

Last week, Bank of America Merrill Lynch (BAML) applied the paddles to the flat-lining European CMBS market. The investment bank launched a deal which has the potential to get the blood pumping around Europe’s commercial mortgage securitisation market once again.

There haven’t been many signs of life since last September, when volatility in the capital markets forced Goldman Sachs to reprice two deals. One former CMBS practitioner even told me that the market has “zero prospect” going forward.

flatlineBut BAML will test that assumption with what it hopes to be the first CMBS of 2016 this side of the Atlantic. The €317 million Taurus 2016-1 DEU comprises a loan written to Blackstone last July to finance the so-called Kingfisher portfolio of German retail properties. (At the time of writing, indicative pricing was yet to be published).

If the latest deal in the Taurus series goes well and makes some money for BAML, others are ready to push the button. A handful of transactions are understood to be at documentation stage and could appear in early Q2. Deutsche Bank and Societe Generale are both reportedly prepping deals and BAML has another in the hopper. The question now is whether the ‘Kingfisher’ CMBS will fly.

The launch of the first 2016 securitisation is an apt time for reflection. CMBS never really came back in Europe to anything like its pre-crisis pomp. It’s been a useful distribution tool for banks in certain deals during the last five years, but a thriving US-style market has not materialised.

European issuance was around €65 billion in 2006. It reached a mere €5 billion last year. Let’s accept that any revival in European CMBS will be at far more modest volumes than before the crisis. But even at comparatively low levels of issuance, a working CMBS market will give European banks an alternative exit route to syndication and therefore enhance liquidity in the sector.

Conor Downey, a London-based real estate lawyer with Paul Hastings, told me this week that he is “hopeful rather than optimistic” for the market’s prospects: “There is a lot of pent-up supply that has built up in the last six months. Banks are ready to issue, but they are waiting for some stability in pricing.

“The market needs to be tested again. If capital markets pricing is too high, then getting a deal wrong can be worse than just keeping loans on balance sheet.”

So, will BAML revive European CMBS?

The macro-economic backdrop remains pretty volatile, which is never good news for bond markets. Factors such as oil prices and the UK’s EU referendum (the “bloody Brexit” as some have taken to calling it) are concerns.

Since the Global Financial Crisis, there has been a question mark over the strength of investor demand for European CMBS. Word in the market is that there are five core investors which any bank launching a deal will need to get in with. However, BAML’s head of EMEA CRE, Matthias Baltes, told a CREFC seminar recently that a German CMBS arranged by the bank last April was sold to no fewer than 37 investors.

In its favour, the Taurus deal looks strong on paper. It relates to a single jurisdiction and a single borrower (the super-covenant of Blackstone). The underlying properties are a mix of German retail including shopping malls, supermarkets and DIY stores.

Maybe BAML’s deal could be the jolt that European CMBS needs to bring it back to life.

Daniel Cunningham is deputy editor of Real Estate Capital

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