What the latest CMBS deal tells us about the structured finance market

BAML’s Devonshire Square transaction in London comes amid widening pricing in the securitisation space.

Pricing indications for Bank of America Merrill Lynch’s securitisation of an office-led campus in London indicate CMBS spreads may be widening, a trend seen across the wider structured finance market.

The investment bank has launched the securitisation of a £275.3 million (€305.9 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 guidance for TAURUS 2018-2 UK was set on Tuesday this week at 110 basis points over three-month Libor for the £213.9 million ‘A’ tranche. The CMBS deal will be priced across two tranches, with the issuer retaining a £100,000 X-note in addition.

In early July, Morgan Stanley’s €220.9 million securitisation of a logistics loan backed by German and Dutch assets, was priced at 75bps for its €113.7 million ‘A1’ tranche, which was in line with pricing seen in previous deals.

Only a few days later, however, BAML and Morgan Stanley’s £299.5 million securitisation of a loan backed by a portfolio of UK logistics properties, had its class A notes priced at 100bps, slightly higher than the initial price thoughts.

Recent widening spreads has been a “market-wide” development, not just limited to the CMBS sector, Christian Aufsatz, head of European structured finance at DBRS told Real Estate Capital.

“The primary market was very active before the summer, and hence there was supply of paper in several asset classes for investors to choose from,” Aufsatz added.

In UK buy-to-let RMBS – which is sometimes used by investors as a comparable for CMBS – triple A tranches have also been priced in the 100bps area, Real Estate Capital understands.

“We have seen a considerable volume of notes coming to the structured finance market in the last eight weeks. Investors have had the ability to be selective and yields have widened across products in this market,” said Matthias Baltes, head of EMEA commercial real estate structured finance at BAML.

“Despite the widening [of CMBS yields], there’s still demand,” Baltes noted.

The latest CMBS deal, is backed by a £235.3 million, three-year, floating-rate senior loan, with the option to extend the loan term by two one-year periods. The loan was provided to a group of borrowers including TH Real Estate, PFA Global Real Estate and WeWork and was priced in April at 155bps over three-month Libor.

The facility, with a loan-to-value ratio of 44.3 percent and a debt yield of 6.9 percent, is backed by an office-led campus of 12 buildings which are 96 percent leased to 45 office and retail tenants, including WeWork, Squire Patton Boggs and Coventry University. The 12 properties have an appraised value of £590 million, which will increase to £621 million upon completion of refurbishment works.

The deal also indicates continued willingness by debt providers to back office assets in the City of London. Despite uncertainty in the aftermath of the Brexit referendum, CBRE reported a sharp increase in take-up of central London office space, rising to 1.3 million square feet in May, 74 per cent higher than the previous month and 36 percent higher year-on-year.

While the occupational market performed better than anticipated in 2017, Savills forecasts rent decreases of 2 percent for Grade A office space in 2018. Rents are also expected to decrease by 2.9 percent and 2.8 percent in 2019 and 2020, respectively.

“There is also the risk that city office yields could rise, especially given the current historic low yields. If overseas demand were to falter, this could lead to value falls,” S&P said in the rating report about the CMBS deal.

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