Tesco’s £685m, fourth CMBS issue backed by income from its own property reflects better pricing and a wider range of investors than its predecessors.
Tesco Property Finance 4 attracted more than 120 investors, from large UK insurance companies and pension funds to smaller fund managers.
The oversubscribed deal was priced at 140 basis points over gilts – a coupon just over 5.8% – compared with 165bps last time.
“The pricing shows investor demand for clean-structured products offering a yield uplift from vanilla corporate debt,” said Christian Lambie, structured
finance partner at Allen & Overy. “As with the previous Tesco deals, the number of investors was beyond what is expected in a traditional ABS deal.”
He identified the underlying credit of the tenant as the strength of the investment. Compared with the first couple of deals, where there was “still a hefty premium for anything structured, even though it was a credit-linked structured bond, [Tesco Property Finance 4] is less tainted.
“That premium came down because the market’s view of commercial structured real estate debt is warming again,” Lambie added. The deal involved 20 Tesco stores and a mixed-use mall development where Tesco will be the anchor tenant.
It has the option to terminate the leases in March 2021 if all bonds have been repaid. The loan-to-value ratio is 106.3% while the loan-to-vacant possession value is 138.3%, although scheduled amortisation will ensure that these decline to zero by loan maturity.
Due October 2040, the notes have been rated A-sf by Fitch Ratings, A- by Standard & Poor’s and A3 by Moody’s. Goldman Sachs, HSBC and JP Morgan jointly arranged the transaction, advised by A&O.