CREFC seminar: ‘disappointing’ ECB and oversupply causing wider CMBS spreads

Widening spreads in the European CMBS market are due to an oversupply of product and a lack of buying by the European Central Bank (ECB), an audience in London was told.

The last three CMBS deals have been disappointing for the issuing banks, Bank of America Merrill Lynch with €145.8m Taurus 2015-3 EU DAC, and Goldman Sachs with the €182m REITALY and £646m Logistics CMBS deals. Selling at below par, they have raised questions over the health of the sector and had issuers scrambling for answers.

While there has been increased volatility in the wider equity and credit markets, delegates at CREFC Europe’s first CMBS in Europe Quarterly Update event, held at law firm Paul Hastings’ offices in London last week, heard there are also factors specifically weighing on securitisation.

“The single biggest factor has probably been the overhang of supply from other ABS markets in Europe,” said Bhavesh Patel, director of commercial real estate EMEA for Deutsche Bank, who presented at the event.

“There is a lot of issuance waiting on the sidelines to be issued when the market is a bit better, away from CMBS but in the wider European asset backed securities (ABS) space, which the market knows is coming. So, investors are a little tentative about putting too much money to work given this supply is coming.”

The lack of ECB purchases of ABS notes was also highlighted despite the launch of the central bank’s European quantitative easing programme.

“Most of the banks and investors were positioned at the start of the year to expect the ECB was going to become a significant buyer, maybe not of lots of CMBS,  but of other ABS product,” said Patel. “I think it’s fair to say the level of purchases from the ECB has been disappointing, to say the least.”

Investors were now starting to re-set their sights on 2016.

“If you ask investors most of them are down for the year and that’s probably impossible to change over the next two to three months,” said Patel. “They’ve probably written off this year now and are aiming to come back next year to a stronger market rather than have a strong finish to the year.”

There has been around €5.6bn of European issuance so far this year, ahead of 2014’s overall total of €4.4bn.  Fifteen CMBS deals have reached the market in 2015,  with 41% of the total securitised assets in the UK. Spain accounted for 24% mainly due to the €1.3bn Silverback Finance, a securitisation of loans made on 754 Santander bank branches in Spain.

Banks with inventory originated for distribution via CMBS are expected to try to syndicate loans instead.