After a slow start to the year, issuance in Europe’s commercial mortgage-backed securities market has picked up. Only two transactions have priced so far this year, in March and April, but at least four more deals are in the pipeline – with Deutsche Bank, HSBC, Morgan Stanley and Bank of America Merrill Lynch behind proposed deals totalling around €1.2 billion.
This suggests a rally for European securitisation is on the cards for 2019. It provides hope for a continuation of last year’s European CMBS revival, in which 13 securitisations were closed, following a dormant 2017.
So far this year, pricing achieved in completed deals has been favourable for the arranging banks. The highest-rated tranche of the Taurus 2019 FR transaction, a €237.1 million deal issued by BAML against French property, priced at 90 basis points at the end of March. In early April, the Kanaal CMBS Finance transaction, a €278.4 million Dutch securitisation issued by Goldman Sachs was priced at 100bps.
At the time of publication, the latest crop of deals was yet to be priced, but the two most recent deals suggest pricing has tightened, following a widening towards the end of 2018. Back then, capital markets volatility led to lower demand for CMBS. In December, the highest-rated tranche of Morgan Stanley’s Salus CMBS was priced at 150bps, up sharply from note margins of around 70bps in the first half of 2018.
Although CMBS pricing is notably higher now than in H1 2018, the spread between the average loan margin and weighted average note coupon in the deals priced so far this year was 59bps, according to a market source speaking off the record. This shows issuers can still benefit from profitable transactions.
CMBS issuers have gradually won the confidence of investors in recent years by issuing deals backed by limited pools of assets from within single jurisdictions or sectors and with conservative leverage, compared with the CMBS deals issued before the financial crisis, which often included large volumes of disparate loans. The recent deals have been sought by investors looking for security while seeking relative value against other fixed income assets.
There is, however, evidence of issuers testing investor demand for deals with more complex collateral as seen in HSBC’s Pembroke Property Finance, which is being marketed. Contrary to the many single-borrower deals seen so far, this €228.7 million transaction is backed by 139 small loans to 78 borrowers on a portfolio of 244 mixed assets in Ireland. From an investor perspective, this granularity could be a positive factor, as it diminishes the risk of loan default. The deal has not been priced yet, but if there is interest in this transaction, it is likely we will see other banks follow suit.
If the current pace is maintained, predictions by industry sources of a 2019 volume of €5 billion in CMBS deals, slightly higher than 2018’s volume, could prove accurate. If capital markets pricing remains favourable to issuers and if investor demand proves strong, the revival of Europe’s CMBS market, which began last year, will continue in 2019.
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