Once-bitten borrowers fight shy of CMBS revival

 Complexity of ownership deters some firms from revisiting CMBS, writes Lauren Parr

There may be demand from investors for European CMBS paper and banks may be busy building the first conduits since the 2007 crash, but not all borrowers would welcome securitisation back. Recollection of the complications that can surround CMBS still linger with some property investors, which are reluctant to go down the CMBS route again. At CREFC Europe’s April conference, Jamie Younger, GE Capital director of debt origination, noted: “A number of borrowers say: ‘are you going to do CMBS? Because if you are, we’re not interested’.”

A condition set out by Aviva Investors and Capital & Regional, majority owners of the Mall Fund, when refinancing its securitised debt with a £375m Morgan Stanley loan, was that it remains unsecuritised. “There’s a stigma around the CMBS structure, caused by problems refinancing at term and sorting out situations where bondholders couldn’t agree on a course of action,” says one debt broker.


Borrowers felt deals to which their name was attached fell out of their control with so many parties involved, each seeking their own advice. Their frustration centred on a lack of action for months or even years while advisers were brought in. “That’s not to say these issues can’t be addressed up-front next time round, but borrowers are nervous,” adds the broker.

Schroder REIT fund manager Nick Montgomery says the protracted Plantation Place CMBS work-out was a ‘distraction’ above all else. The listed trust had a one-third share of the equity in the City complex, which it invested in in 2006 when it was called Invista Property Trust. During the crash in values of 2008-2009, the deal’s loan-to-value covenants were breached.

“Multiple parties were pursuing interests in the asset, which was of sufficient quality that when the market recovered, everyone got out whole,” says Montgomery. “The asset was sold at the entry price; we got our equity back and bondholders were repaid in full.”  The lawyers were the only ones to benefit from the “distraction”, he adds.

For a company such as Schroder REIT and others (see panel, left) CMBS financing can be cheap up front but more costly when taking into account active asset management of a portfolio; for example, the legal costs attached to refurbishing and selling assets. “A higher degree of paperwork adds a fair degree of costs,” says Montgomery.

Thus borrowers feel CMBS suits specific assets and borrower types. “If we owned a portfolio of well-secured, government-let buildings on which we could borrow at a competitive margin in the CMBS market, we’d feel more confident that the limited amount we’d have to do to the portfolio would make our costs lower,” he reasons.


Charles Mackintosh, legal and finance direc-tor at outlet mall company Value Retail, points out that the up-front costs of CMBS can be expensive, taking into account credit agency, underwriting, legal and listing fees. ““If it costs £10m to get into [a CMBS] and your business cares less about up-front costs and more about creating dividend over a term, and you can fold that into a loan so it doesn’t hit cash flow, fine,” he says. “For a company like ours, considering those costs, I don’t see a price advantage. You would have to work hard to get cheaper financing than some bank deals.”

Last year, CMBS was a vital refinancing source for billions of euros of maturing German multi-family housing loans. And  for some big borrowers, the bottom line is cost. They look for where the best deals are – CMBS has always been a low-cost option and it can offer higher leverage. “We wouldn’t exclude it; key criteria are pricing and depth of the pool,” says Lars Schnidrig, managing director of finance and treasury at Deutsche Annington.

In July 2013, however, the German residential landlord decided to repay Europe’s biggest CMBS, the €5.8bn GRAND, with non CMBS finance. Schnidrig says: “We benchmarked CMBS against other instruments and chose unsecured, corporate bonds, for two reasons: to diversify our funding sources and smooth our maturity profile. We always tackle the most efficient instrument; if CMBS spreads are most competitive, we may think about going through CMBS.” While some borrowers say “never again” to CMBS, that is not the uniform market view. Schroder REIT’s Montgomery says:  “It suits long-term investors and ideally property with less to do in terms of costs associated with operating in that structure.”


For some borrowers, the first incarnation of CMBS didn’t quite work. The prospect of  a fairly new, cheap product In 2005-2007 caused companies whose business lines were incompatible with securitisation to jump on the bandwagon. “I’m not sure the concept itself is flawed, which is why it’s coming back in other markets,” said AEW Europe chief investment officer Rob Wilkinson at the Loan Market Association’s conference last month. “The way it was used pre-crisis rather than the structure itself [was the problem] so I’d welcome it as providing more liquidity and lower costs to borrowers. But you have to go in with your eyes open – there is less control.”

This time round there is a recognition that CMBS is a product more suited to select borrowers and properties, and many that took part in securitisations are edging towards bank facilities now that liquidity is plentiful. North-West office landlord Bruntwood is one of these. Last year it refinanced over half its £440m of CMBS debt with new balance-sheet loans. The £204m remainder, at a 72% loan-to-value ratio, was extended until January 2016, and was “geared higher than institutions were looking to lend then”, says Bruntwood chief financial officer Kevin Crotty.

A lack of flexibility, both at inception owing to deals’ initial ratings and over time as multiple parties are involved, is one of borrowers’ biggest gripes. This can make it difficult for a borrower to make changes later. If a change to the documentation or a waiver is required, for example, a borrower must go through the trustee or servicer and may need to get consent from bondholders “We negotiated what we thought was a flexible package that worked for us because our stock isn’t standard,” Crotty says. “Our assets are let to 2,000 customers on one to 15-year leases, so we’re always seeking conversion options and it’s sometimes necessary to sell and substitute properties. “But nothing ever quite fitted into what was agreed as part of the legal documents.”


Business park owner MEPC says getting protection written into the documentation would be a top priority if it were to consider securitisation again. The group had to seek bondholders’ consent to release one of four cross-collateralised business parks from the Opera Finance (MEPC) CMBS; “not the easiest task”, says finance director Rachel Page.

“A lot of borrowers had difficult CMBS experiences, possibly resulting in performing loans being controlled by an agent or special servicer acting for bondholders,” says one debt originator. An even trickier situation is if a borrower’s loan ends up with a lender it doesn’t want to be associated with, which is not interested in the business and will look to repossess assets if there is pressure on covenants.

Restructuring is more challenging if the loan becomes distressed because agents and special servicers generally have a limited ability to do something ‘outside the box’ in terms of what the loan facility says. Rather than speaking to one lender, you have to speak to the agent; the special servicer then approaches the bondholders,” the originator says.

“It becomes painful. A lot of people want to be in a position where if something changes or goes wrong, they can go to the man that lent them the money in the first place.” Kevin Crotty, chief financial officer at office landlord Bruntwood, agrees: “We didn’t  like the faceless side of things. A bank understands your business and is more amenable to what you’re trying achieve.”

Outlet mall company Value Retail repaid the last of its CMBS in January “with an enormous amount of relief and satisfaction”, says director Charles Mackintosh. “CMBS’s inflexibility in terms of what we can do with our assets doesn’t always suit our sector, where we are always adding to or improving outlet villages.”

He adds: “We were delighted to get back into relationship banking on our Madrid outlet village, which also enabled us to raise the debt level by around €5m to upgrade and expand some of the units. Above all, I want to know who is handling our debt. I would rather know the people who sit around the table if there is a problem and know that they will be closely interested in our solutions.”