Before covid brought structured finance markets to a halt, issuance of European commercial mortgage-backed securities was on track to surpass 2019 levels. Three deals were priced by mid-March, including Goldman Sachs’ €186.4 million securitisation of debt backing two Paris offices – marketed as Europe’s first ‘green’ CMBS.
Ratings agency Fitch recorded €5.9 billion of 2019 issuance, though that included €1.8 billion across two single-tranche deals. This year’s first three deals totalled almost €1.1 billion. For a while, it was uncertain there would be a fourth. However, on 20 July, Bank of America launched Taurus 2020-2 UK, a securitisation of part of a loan to US investor Blackstone. It was secured against a mixed-use UK portfolio, primarily featuring logistics. Launched as a £393 million (€429 million) securitisation, it was £450 million when priced on 6 August.
According to Euan Gatfield, EMEA head of CMBS at Fitch, the successful issuance of a new deal indicates greater confidence among bond investors in real estate’s performance: “Investors were telling bankers that, until greater clarity on commercial properties’ rent collection and performance was seen, they would have little appetite for taking on more CMBS exposure.”
The highest-rated tranche of Taurus 2020-2 UK was priced at 170 basis points over the Sterling Overnight Index Average. It showed a widening of pricing since March, when Bank of America’s previous deal, secured on Dutch property, was priced at 90bps over three-month EURIBOR in its AAA-tranche. Market observers say it proves investors are keen to buy paper, which is in relatively short supply.
Journey of discovery
During lockdowns, issuers and investors were in price discovery mode, says Andrew Petersen, partner at law firm Alston & Bird: “It was uncertain how CMBS would hold up to the crisis.” He adds that the conclusion of the deal is likely to bring other investment banks back to the market this year.
Gatfield believes investor demand will be determined, in part, by pricing of other structured finance products. “[Investors] tend to look for relative value across the wider floating structured finance market,” he says. Factors driving spread development in CLOs and non-conforming residential mortgage-backed securities, for instance, will influence CMBS pricing. “Arrangers have to judge not only this, but also the direction of loan pricing trends.”
Sector choice will be important. The weighting of Taurus 2020-2 UK to logistics, which has held up well, is thought to have been key to its success. “Logistics and student housing will be relevant as some sponsors will want to continue to increase the size of their portfolios in these asset classes,” says Clarence Dixon, global head of loan services at consultant CBRE. “Data centres are becoming increasingly attractive, although the supply may possibly not meet the demand.”
Views differ on office-based CMBS. Gatfield argues that although retail and hospitality assets will see a swift correction in values, office valuations will take longer to evolve. Petersen, however, does not rule out issuance of office-based CMBS this year: “Even when [offices] are empty, they generate income, given that tenants have the obligation to continue paying their rent.”
He says further issuance of ‘green’ CMBS bonds would also support the sector’s prospects: “Deals with ESG credentials would be of greater appeal to investors.”
Hopes are high that, if real estate market conditions improve and capital markets pricing remains favourable, there could be an H2 issuance rally. “We could see four or five deals taking the issuance figure to UK 2019 levels, but not higher,” predicts Petersen.