Why Blackstone took the agency CMBS route for its Italian refi

The private equity giant enlisted Deutsche Bank to arrange a securitisation of four retail properties in Italy.

In opting to refinance a portfolio of Italian retail properties through an agency securitisation, private equity giant Blackstone has further tested investor demand for European CMBS paper.

The deal comes as momentum builds in the CMBS market. Last November, Bank of America Merrill Lynch issued the first publicly-traded UK transaction since 2015, with the £347.9 million (€389.3 million) Taurus 2017-2 UK DAC, which securitised ‘last mile’ logistics facilities, sponsored by Blackstone.

The latest deal – the circa €404 million Pietra Nera Uno – is notable for the fact Blackstone initiated the deal to refinance a shopping centre and three fashion outlet villages purchased in recent years, with Deutsche Bank appointed to arrange the transaction. Agency transactions remove the role of the banks as intermediate lender, allowing borrowers, through a vehicle, to directly raise finance in the capital markets.

“As a large borrower of real estate debt, we are incentivised to support a healthy European CMBS market,” Gadi Jay, principal within Blackstone’s real estate business, tells Real Estate Capital. “Having a functioning CMBS market is positive for us and for the market in general as alternative sources of capital.”

The decision to launch an agented CMBS was taken for several reasons, Jay explains: “Given that this was a refinancing, there was no specific time pressure as there would be on an acquisition financing, in which case we opted to pursue this avenue with the help of DB. Certain assets tend to lend themselves better to CMBS than balance sheet loans; for instance, higher-yielding asset classes.”

The fact that two of the three loans had been previously securitised was also a factor, Jay adds. “Investors were already familiar with the assets. It wasn’t a determining factor, but it was a consideration.”

The deal reflects a loan-to-value of 74.7 percent. The highest rated tranche of notes priced at 115 basis points – rated AA/A+ by DBRS and Fitch respectively – with the top three tranches understood to have priced at the tight end of guidance. The bottom three tranches, however, priced at the wide end of guidance, with the bottom tranche at 675 bps – rated B- by both DBRS and Fitch. In comparison, the A-tranche of BAML’s Taurus deal priced at 85 bps (rated AAA), with the lowest tranche at 350 bps (rated BB/BB-).

“The overall leverage and blended pricing compared favourably to what was obtainable through a balance sheet financing,” Jay comments. “The widening of the junior tranches possibly reflected the recent volatility in the equity markets,” he adds.

Agency deals have the potential to help revive the European CMBS scene, according to Iain Balkwill, real estate finance-focused partner at law firm Reed Smith: “Agency deals could potentially be an invaluable tool for any sophisticated borrower that is looking to directly tap the capital markets to raise cheaper finance.”

Structuring such deals is more time and resource intensive than plain vanilla financing and requires the sponsor to have the need for a large enough volume of finance to make a public rated deal an attractive proposition. As a large-scale borrower, Blackstone fits the bill for such a deal.

“From a borrower’s perspective the most appealing feature of an agency deal is that finance raised through these structures is greatly cheaper, as they only have to service the coupon on the notes and therefore are not required to stump up additional amounts to cover the payment of excess spread and any regulatory costs of the lender incurred prior to distributing the loan and satisfying the 5 percent retention requirement,” adds Balkwill.

Agented CMBS is an option Blackstone will consider for future deals, Jay says. “We always look at individual deals to consider which financing route makes sense.”