Comment: Deutsche Bank restarts CMBS – but with a push from investors

Deutsche Bank has almost certainly pulled it off: it is just days away from closing the first new CMBS transaction to be sold to investors for almost four years. After much anticipation, there was enough investor demand for the debt, secured on Blackstone’s Chiswick Park, though European buyers weren’t beating down the door. Deutsche is said to have had an offer from one US investor, rumoured to be Pimco, to buy the whole lot, possibly attracted by the higher spreads than it can get back home.

But the bank was keen to prove that CMBS has a future capital markets role  in Europe and that there is an embryonic investor base. So its target was to sell to as wide a range of investors as possible. Investors will have felt that DECO 2011-CSPK just about ticked all the boxes: sufficiently attractive pricing; a fairly simple structure, if three tranches not one; a single jurisdiction, even if the entity  owning the assets is offshore in Jersey; one loan, and with the advantage of the collateral backing it being 40 tenants in nine assets; a strong sponsor and asset manager in Blackstone and Broadgate Properties; and just enough modification of past features that led to investor disillusionment.

But it sounds as if prising open the market again was hard work. At the last minute, secondary CMBS market pricing weakened and spreads moved out, giving investors more clout. M&G and others insisted that the bank further improve the deal in their favour, by restructuring the class X note and giving senior noteholders more control if there is a default.

Agreeing these changes delayed the final closing, demonstrating how difficult it is to navigate new territory. Of course, if the bank had offered a more investor-friendly solution to begin with, the last-minute hitch would have been avoided. Investors were no doubt determined to avoid a precedent being set on X notes that was more in the bank’s than their favour, although future CMBS deals are bound to look a bit different as the market evolves. Those on the banks’ side will point out that Deutsche Bank won’t continue going to all the trouble of putting a complex deal in place if they can’t turn a profit, nor will other banks, and that if investors won’t accept class X notes, then some other way must be found to make it worthwhile for banks to structure and distribute debt.

They will say that new regulations, particularly the 5% retention rule, probably already make it uneconomic for smaller banks to ever come back in. They will argue that CMBS transactions can be very good deals for investors such as pension funds and insurance groups that want alternatives to gilts and corporate bonds. The positive for both sides is that there has been a robust dialogue over DECO 2011-CSPK between all the parties, structurer, sponsor and investors. Previously structurers complained that there was no feedback from investors. They may not like everything they are hearing, but they are getting it now.