More CMBS may be served up as investors regain appetite


Paul Hastings highlights renewed interest in CMBS and high-yielding debt, reports Jane Roberts

The outlook for European real estate credit markets is brighter than at any time in the past five or six years.

Cynics might say things could hardly get worse. After all, there were four years after 2007 with zero capital markets activity and only five publicly marketed CMBS issues since mid 2011.

Meanwhile, the waves of quarterly maturing CMBS are increasingly backed up, awaiting refinancing: another €22bn worth is due to mature this year.

However, at last Autumn’s Commercial Real Estate Finance Council conference in London, CREFC council member Nassar Hussain predicted €5bn-€10bn of European CMBS issuance in 2012 – a notable rise off the admittedly low base.

Now Paul Hastings’ real estate capital markets and restructurings group also says conditions are set fair for an increase in CMBS and high-yielding debt issuance.

The law firm advised on Deutsche Bank’s three securitisations since June 2011 – secured on Chiswick Park, the Merry Hill shopping mall in the West Midlands and the Vitus German multi-family housing portfolio – so is well-placed to gauge sentiment towards CMBS issuance.

It also advised the investors that participated in Terra Firma’s high-yield debt issue last November, used to buy Nomura’s portion of the Annington homes business in the UK.

Flynn: “There is increased appetite from investors starved of asset-backed securities and fixed-income products”

Paul Hastings associate Miles Flynn says there have been three question marks against a CMBS financing revival: whether there is enough investor appetite; whether borrowers are willing to access capital markets; and banks’ willingness to arrange deals. The firm reports improvement in all three areas.

“Based on [new] deals we’re advising on, there is increased appetite from investors starved of traditional asset-backed securities and fixed-income products,” Flynn says. A recent example was JP Morgan’s purchase of 75% of the bonds in Deutsche Bank’s €754m Florentia German multi-family housing CMBS in September.

Flynn says Paul Hastings is looking at three new CMBS deals that would raise around €1.4bn, “one conduit, one agency deal and a private placement, all of which we hope will be completed in the first half of this year”.

He says borrowers that need to refinance maturing CMBS loans will drive the market in 2013. “Borrowers need to consider all refinancing sources, including CMBS.

Traditional finance may be as complex for them as a CMBS exit,” not least because many maturing loans are very large and it is challenging to form clubs to refinance them.

Florentia points to banks’ return

Flynn adds that Florentia “was important in showing how banks could return to the market”. Its structure met the new requirement for issuers to retain a portion of the bonds. “The sponsor rather than investment bank kept the retention piece, which means banks don’t have to take balance-sheet risk.”

Flynn’s colleague Charles Roberts expects to see more such ‘agency’ CMBS deals this year, but encouragingly, he adds: “We are also hearing that banks have room to take transactions on their balance sheet.”

For example, Bank of America Merrill Lynch has agreed to refinance €1bn of CMBS debt about to mature and secured on the German multi-family Woba residential portfolio, for borrower Gagfah. “That shows banks are more optimistic about placing in the capital markets and is a positive sign,” says Roberts.

The firm also expects more ‘high-yielding’ issues this year, following two last year by Terra Firma, to buy Four Seasons’ UK nursing homes business and Nomura’s part of the Annington MoD housing business, plus a third that helped refinance Centre Parcs. The latter combined CMBS and high-yield finance.

Partner Conor Downey says: “Terra Firma has a lot of real estate debt and it would be no surprise if it and other owners of a lot of real estate in operating company/property company structures did more issuance.”

Still some mileage left in non-performing loan market

“People will tell you 2013 is the last good year for (buying) non-performing loan portfolios, or even that the time is past,” says Paul Hastings’ partner Charles Roberts.

He sees some truth in this “as credit will recover despite the fact they are legacy assets. Banks are figuring out that they can restructure assets before sales to enhance their value.”

But there will still be big non-performing loan sales this year, he reckons, particularly from NAMA, which will have former Irish Bank Resolution Corporation loans to sell later this year as well as its own loans.

Roberts: “Banks are figuring out that they can restructure assets before sales to enhance value”

The firm believes loan enforcements are slowing in the UK. Investors “haven’t been that happy” with some enforcements, says partner Michelle Duncan, “given where values and swaps are. So I think we will see more restructure-and-manage strategies, driven largely by noteholders.”

The exception is in Germany, where loan enforcements have increased after a change in the laws governing insolvency.