CMBS leap in 2013 may be just a blip

Last year’s jump in CMBS financing to a post-crisis high of €8.2bn may be unsustainable, according to Standard & Poor’s. In a relatively pessimistic outlook on the wider European securitised markets, S&P said the €8.2bn of CMBS issued in 2013 greatly exceeded the €2.7bn in 2012, but was unlikely to be repeated this year (see fig 1). “The 2013 jump might be short-lived because a lot was refinancing of existing German multi-family housing deals,” said the rating agency’s senior director of structured finance research, Andrew South.

Last year there were 12 CMBS issues, up from six in 2012. But four repackagings of very large German multi-family housing securitised loans made up 50% of the market (fig 2). The €2bn German Residential Funding 2013-1 and €1.1bn Taurus 2013 (GMF 1), both sponsored by Gagfah, made up nearly 40%. The largest pre-crisis multifamily housing issues have now been refinanced and S&P said this year only €600m of loans secured on German housing, in seven deals, are set to mature. This is a key reason why “maintaining primary market momentum may be a struggle as some of the dynamics that drove 2013 growth are unlikely to be repeated in 2014. There is little prospect of further large German multi-family housing refinancings lifting European CMBS volumes.”

CMBS a)       CMBS b)

South said German multifamily housing issues were also “a slightly atypical CMBS asset, with well-funded sponsors able to inject new equity. That is not the case with other deals.” S&P believes that of the €8bn of CMBS loans it monitors that mature in 2014 “only just under €1bn have low loan-to-value levels, are single loan deals with strong sponsors” that could be “easily refinanced”.

South said one positive is cheaper funding costs. Secondary senior CMBS spreads have tightened from about 575 basis points in early 2012 to 225bps in late 2013, while spreads for senior European tranches of new issues range between 105bps (on Taurus 2013) to 200bps. This is lower than average lending margins, “making CMBS feasible as a funding option for originators”.

While European loan servicers, whose main work is servicing CMBS, see little chance of a revival in issuance this year (see pp15-20), investment banks are more bullish. Bank of America Merrill Lynch believes new issuance could exceed €10bn.

European CMBS market’s 2013 gain was UK RMBS market’s loss

CMBS issuance bucked the trend in 2013: while it almost trebled, the overall volume of new European securitisations placed (ie sold to investors) fell slightly, from €67bn in 2012 to €63bn in 2013 (see figs 4 and 5).

As a result, CMBS issuance leapt from 4% of the market to 14%. The dramatic 2013 change was a plunge in banks’ funding via RMBS; in the UK, it fell from 34% of 2012’s securitisation market to 7% of 2013’s, even as gross mortgage lending rose.

Retained issuance fell for the fourth successive year (see fig 3), but S&P’s Andrew South said this is no surprise – in 2008 at the height of the financial crisis, banks packaged up legacy loans as CMBS to pledge with central banks for funding, which they have since been “weaning themselves off”.

CMBS 3       CMBS 4       CMBS 5

South said the plunge in RMBS could be down to factors other than investors rejecting the “financial technology”. In the Netherlands, for example, deal issuance is down 50% since before the crisis, but so is gross mortgage lending.

In the UK, mortgage lending rose as banks used cheaper Funding for Lending Scheme funds to supplement deposits for mortgage lending. But the Bank of England is now turning off this tap for residential mortgages (see analysis, p14). South added: “A lot of banks that previously securitised do not need much funding, as they are shrinking balance sheets.”

He also said that with high capital charges for ABS under Basel III and Solvency II, and only some RMBS treated as a liquid asset, banks were unlikely to become CMBS buyers again.