Non-vanilla securitisations satisfy new taste for risk

Deals involving UK secondary and Italian assets achieve keen pricing, reports Lauren Parr

Europe’s CMBS market is suddenly a hive of activity with the launch of two new issues in as many weeks, three further deals ahead and a smattering of new enquiries. Helped by a positive ABS conference in Barcelona in June, investor demand is high, while loan servicers are competing aggressively for a slice of the CMBS action.

Bank of America Merrill Lynch’s £211.5m Taurus CMBS UK 2014-1 issue in late June followed Deutsche Bank’s €355m DECO-2014 Gondola. Both have been priced and are being allocated to investors. The nature and pricing of the issues surprised some spectators. One adviser says of Taurus’s collateral,135 secondary UK properties with a 16% vacancy rate: “It’s not a natural deal for CMBS”. Apollo paid £352m for the ‘Moon’ portfolio last November.

“This shows a move towards slightly riskier assets in CMBS and is reference to the fact that the market for prime assets is too competitive right now,” he adds. Pricing of 150bps for Taurus’s single Arated bonds, despite the lack of a liquidity facility, shows the level of investor appetite.
One loan servicer says: “I’m surprised you can assemble a UK deal that enables a margin for a securitisation to stack up.”

Rating agencies Fitch and DBRS allowed the deal to get away without a liquidity facility because of its granular portfolio, which makes the chance of all the properties together needing a liquidity facility remote. The pricing for Gondola’s AA-rated bonds, with a liquidity facility, is slightly cheaper. The adviser notes: “The fact that an Italian AA-rated deal is priced almost the same as a UK single A-rated deal shows there is still significant variation on pricing in Europe.” Both deals have strong sponsors: the Gondola borrower is Blackstone. In Italy, where the enforcement process is protracted, it is important that a sponsor will cooperate.

investors seek out cmbs

One point of agreement in the debate about how to improve European CMBS has been that ‘vanilla’ deals are preferable. Yet the market has moved on, with investors seeking out the asset class, as alternatives, such as sovereign debt, are so low yielding. Taurus has an average two-year life, for example, despite investors’ concerns about conducting extensive due diligence for short-term deals.

AAA notes in the first securitisation of Chiswick Park, which was a full standard deal with all the bells and whistles for investors, were priced at 175bps and within six months were trading 200bps higher in the secondary market. The adviser asks whether with Taurus “there is an investor lined up to take a particular part of the capital stack? Could it be a regulatory play?” What he calls “funky” loans are expensive to hold – in this case the strategy would be to sell the junior and keep the senior rated piece.

“Who’d have thought 12 months ago we would have seen four Italian deals in the market?” he asks. Gondola is the third. Goldman Sachs
marketed the €363m Italian Gallerie CMBS in November and is set to launch a second Italian CMBS secured against Blackstone properties, for which CBRELS has won the servicing mandate; while last year, BNP Paribas issued a €135m bond for Italian REIT Immobiliare Grande Distribuzione.

As Real Estate Capital revealed last month, Deutsche Bank’s and Crédit Agricole CIB’s circa £550m Westfield Stratford securitisation is under way, with Capita as servicer, and DB is also working on a multi-loan Dutch CMBS. “A year ago, people said the Dutch market was dead,” the servicer adds. One lawyer has received early enquiries from banks on three or four other deals, one of which may be in the UK, one in the
Netherlands and another in Italy. Interestingly, he also received enquiries about deals in France, Portugal and Spain. Says the servicer: “It has to happen in Spain and Italy. In Spain, the vanilla product and the margin is there.

Gondola & Taurus stats pg12