Banks are increasingly adopting originate-to-syndicate models, although big-ticket financings are less frequent than during 2015, writes Daniel Cunningham.
The European market for syndicated commercial property loans has grown significantly during the last two years. Figures comprised by data provider Dealogic showed that 147 secured loans with a volume of €32.9 billion were syndicated in Europe in 2015, up 50 percent on 2014.
However, syndication is a trickier prospect than it was this time last year. Large loan originations are less frequent due to a combination of economic and market factors, while the upward trajectory in pricing in some countries means that deals can quickly look uncompetitive to prospective syndicate partners.
“Pricing has increased by a minimum of 30 basis points since the end of last summer, meaning that some of those banks that wrote loans in December or January for March or April drawdown have found that deals priced correctly at one point were priced incorrectly when they attempted to sell them down,” says one London-based banker, speaking in private. “Some have had to give away most of their fees in order to sell down.”
There are suggestions that investment banks’ appetite for large underwrites has been tempered by the fact that distribution options are limited by the malaise in the CMBS market. Investment banks want premium margins in order to originate large loans, some say.
However, syndication bankers generally argue that the market is functioning well in spite of the fact that the wider real estate sector has been somewhat subdued so far this year. Paul Homewood, director of real estate syndication in Lloyds Bank Commercial Banking’s capital markets division, argues that there is a continued demand for syndicated loans, provided the facility is sensibly priced.
In April, Lloyds sold a 50 percent slice of its £185 million investment/development loan secured by London’s O2 arena to Industrial and Commercial Bank of China in one of the UK’s largest sell-downs this year. “We remain active and continue to distribute, although the market is slower,” Homewood says.
“There have been headwinds in the market and banks’ cost of funding is typically higher, so it has perhaps caused an upward shift in the primary market. Lenders who priced loans too finely have struggled,” he comments. “In previous years, loan buyers were willing to accept skimmed margins, but they were hungrier for product in 2014 and 2015. They will not accept skimmed margins today.”
The impact of the shift in pricing was arguably most pronounced in Q3 2015, especially in the UK market. Lenders which had written large loans in the low-margin environment preceding late summer faced the task of syndicating loans following an abrupt uptick in margins.
By now the market has got to grips with the fact that pricing has risen, argues Jean-Maurice Elkouby, head of ING Real Estate Syndicated Finance: “If you are doing deals now, 150 bps is the new 120 bps.”
Frank Jeschke, head of portfolio management at LBBW, explains that the bank has coped with changing market conditions by ensuring that its syndication and underwriting teams work together during the structuring of the loan. “We are not at the end of the movement in margins in the UK market. So, as a bank with an underwrite-and-partially-syndicate model, you are in a good position if you stick to your strategy and identify partners early.”
“It’s important to start the syndication process when structuring the loan so that you don’t run into a time lag and risk the market moving away. We sit at the table with our origination guys. It’s also crucial to have an overview of all the parties active in each financing market.”
In April, ING and LBBW jointly provided a £400 million loan to finance the Salesforce (previously Heron) Tower in the City of London. The two banks are in the process of syndicating the debt. An initial wave, understood to be four banks, had joined the syndicate by the latter part of June, with a second wave expected to commit imminently.
In recent months, the uncertainty created by the UK’s referendum on EU membership has been blamed for slowing investors’ decision making. However, ING and LBBW argue that the Salesforce Tower syndication has been possible despite this. “We closed a first wave of commitments to the syndication before the UK referendum” says Jeschke.
“The deal was structured conservatively and priced at market, but with the referendum some lenders who usually operate on the continent asked why they should do a deal in the UK prior to the vote,” says Elkouby.
“Liquidity reduced to a degree in the UK as a result of the referendum vote, with some foreign lenders putting decisions on hold or worried about currency movements. Some less experienced lenders were waiting for more clarity, but they haven’t left the market,” says Sofya Shuster, Elkouby’s colleague at ING
Generally, says Shuster, the prospects for syndication across Europe are positive. “The German market remains very aggressive and pricing hasn’t increased. There is healthy investor demand in the Netherlands as well. Spain remains as aggressive as ever.”
Significant recent continental European syndications include HSBC’s sell-down of a large part of its €800m Potsdamer Platz loan to Brookfield and LBBW’s syndication of a €1.35 billion loan to Hudson’s Bay Company to finance the Galeria Kaufhof department store chain (see box below).
“We were pretty clear at the time of the underwriting who we would syndicate to. In total we syndicated more than €900 million, which was more than expected,” says Jeschke. “We will continue to do deals like this on selected occasions and are looking for €500 million-plus sole underwriting opportunities.”
Indeed, Jeschke points out that an increasing number of banks are aiming to step up their syndication activity even if they are avoiding large underwrites. “Banks are increasingly aiming to book and partially sell loans rather than hold them. It is possibly a result of increased regulation making it expensive to hold loans. However, we will continue to retain significant stakes in our loans and even more are free to fully hold large loans on balance sheet due to our strong capital base.”
As banks await the outcome of the latest Basel Committee proposals to standardise risk-weighting across Europe, those banks which currently use internal ratings-based models – including German banks – are conscious that loans are likely to become more expensive to hold on balance sheet under a standardised approach.
One major bank aiming to increase syndication is Germany’s Helaba. In April it restructured its distribution team in order to help achieve its aim of syndicating a quarter of its loans. From just doing bilateral lending as recently as three years ago, the German bank did €1 billion of syndication last year and plans to double it by 2018, with around a third targeted towards German savings banks.
The investor base remains diverse. Asian banks including Japanese and Chinese banks have proven keen to buy into European deals. Some Chinese banks have become more hard-nosed about their roles in deals, with some keen to originate within clubs rather than just buy syndicated pieces as they become an increasing force in the European market. New entrants into the market from Asian countries such as South Korea and Taiwan have also been noted.
Within Europe, Spanish banks including La Caixa, BBVA and Sabadell are reported to be keen to invest outside their national borders in a bid to access prime financing deals. Spanish banks’ appetite was demonstrated in ING REF’s syndication of its Torre Espacio loan to Filipino investor Andrew Tan (see box left).
Fundamentally, the European syndication market remains strong. Originating banks want to syndicate and there is enough demand to support their ambitions. However, syndication desks’ activity is ultimately determined by the confidence of originations desks to write big-ticket loans.
“By this point last year, we had syndicated €2 billion,” comments Elkouby. “We haven’t achieved that so far this year, but we have a pipeline which we hope will materialise after this summer.”
Major 2016 syndications
• LBBW syndicated more than €900 million of its €1.35 billion loan to Hudson’s Bay Company backed by the German Galeria Kaufhof department stores. Fewer than ten parties including German mortgage and savings banks, international banks and insurers bought pieces.
• HSBC sold a large part of the €800 million loan it wrote to Brookfield for the Potsdamer Platz estate in Berlin. AXA, Bank of China, Helaba, pbb Deutsche Pfandbriefbank and Berliner Sparkasse bought in. Deal closed late 2015/early 2016.
• Lloyds sold 50 percent of a £185 million part-investment, part-development loan written to Crosstree Real Estate Partners and Anschutz Entertainment Group secured by London’s O2 arena to Industrial and Commercial Bank of China.
• ING’s €420 million loan to refinance the French assets in AEW Europe’s Logistis fund was sold to: Berlin Hyp (25 percent), Bayern LB (25 percent), plus China Construction Bank and a French bank (25 percent between them).
• ING’s €280 million loan to finance the Torre Espacio in Madrid for Philippines-based investor Andrew Tan was sold to: La Caixa (more than €70 million), Bankia and Bankinter (circa €38 million each), MuenchenerHyp (€26 million) and Deutsche Postbank (€38 million).