Solvency II threatens to slam door on re-opening for CMBS

Fears that regulation may scare insurers off CMBS are aired at ABS event, reports Jane Roberts

There is no sign of the European CMBS market re-opening for new issuance, judging by the year’s biggest annual securitisation conference, held in Brussels this month.

One of the strongest fears voiced in many of the IMN Global ABS sessions between 12-14 June was that incoming Solvency II insurance company regulations will further frustrate attempts to build a new investor base for CMBS and other structured bonds.

Paul Heaton, Deutsche Bank’s vice-president in securitisation research, said insurers  will have to hold 7% capital against AAA bonds, equating to 35% over a five-year note’s term – far higher than the requirement for standard mortgages. Many asked whether this will cause an exodus of insurers from the structured finance market in Europe.

As several speakers pointed out, this matters because ‘real-money investors’ –  insurers and pension funds (which may also be drawn into Solvency II) – are the great hope, now the structured investment vehicles and banks that bought bonds before the credit crunch have quit, burned by losses.

Heaton said big insurers may be able to get their own internal risk models approved by local regulators and continue to invest efficiently in structured bonds, but smaller insurance companies may not. Mark Nichol, research director at Bank of America Merrill Lynch, asked: “Will pension funds have the same issue with CMBS as insurers and want to buy whole loans (instead)?”

Caroline Philips, Eurohypo’s head of structured debt products, said finding a new investor base is “the biggest challenge. In the boom, 90% of AAA CMBS was sold to SIVs. If we had investor demand now, the CMBS market would come back, because banks want to do it. But they’re not confident that real money investors are out there.”

Philips said keeping new structures simple to attract investors was not a problem. “It’s how the market started. It only got more complex later, when people got comfortable.”

She believed borrowers could favour CMBS again, although David Newby, head of European CMBS and UK finance at Natixis, said persuading borrowers to use securitisa-tion for single deals had been tough in the past, even when it was the cheapest option. “You were always told it was inflexible… you had to approach rating agencies about any changes to structures.”

Borrowers “relaxed” about securitisation

Philips replied: “On that point, where loans are performing, our borrowers have been relaxed about them being securitised. We made CMBS look as much like syndicated loans as possible and did the servicing, so sponsors always had us to deal with “Reporting was more onerous and more public and obviously where a loan defaults it is more difficult, but even there you are dealing with investors that are now very happy to get involved in restructuring and you only need 75% assent instead of the 100% needed in a syndicated loan.”

Newby questioned whether banks were able to warehouse loans on balance sheet, and said Deutsche Bank’s European and US roadshow for its Chiswick Park securitision a year ago “seemed to last a long time and maybe three investors bought the deal. It is hard to call that a successful distribution.”

Chiswick Park was one of only two new European securitisations since the market closed, both arranged by Deutsche Bank last year. The bank was working on another, ‘Centaurus’, to refinance a German multi- family housing portfolio, but if it happens it would be an agency issue by the borrowers. Similarly, RBS’s plan to securitise its loan against the Project Isobel debt portfolio will not be a public sale (see News).

Eurohypo has not written any new loans since last November, but is rumoured to be talking to borrowers again. Philips said it would not underwrite on the basis of a sole securitisation exit, “but where one could syndicate in the whole-loan market, as a back stop. We would love to find a loan we felt was right and if we have a fighting chance to get it away in the securitisation market, we will have a go.”

New lenders and relationships offer glimmer of hope for market

Eurohypo’s Caroline Philips and other speakers predicted that the trend for banks to form relationships with insurers and other new property lenders to originate senior loans would be a first step in “creating relationships for a future CMBS market”. BoAML’s Nichol saw emerging senior debt funds as potential CMBS buyers, along with mortgage REITs (if legislation is passed).

Delegates said Solvency II’s more positive treatment of whole loans – a far more illiquid and opaque asset than listed and rated CMBS – was ironic. Henderson Global Investors plans to invest in senior loans, but head of secured credit Colin Fleury  pointed out that it is not “pitching debt as an asset class because it works under Solvency II, but because of the risk-adjusted returns and because it is a good opportunity, given everything going on with the banks”.

Delegates added that while real money investors are now interested in senior and whole-loan investing, not all of them are quitting ABS investing, at least in the secondary market, where Deutsche Bank’s Heaton said 8-10% returns are possible.

M&G Investments’ alternative credit fixed-income team are rumoured to have two new pension fund investors lined up  to come into its recently re-opened flagship £500m Lion Credit Opportunity Fund, which is 50% invested in secondary CMBS.