Big-bank issues should meet investor demand later this year, reports Lauren Parr
To anyone outside the investment banks, or their close advisers, the European commercial mortgage-backed securitisation market may appear to have stalled – again. Last year it had looked like recovering, with more than €8bn of transactions, aligning it with 2003 issuance levels. Banks had expected 2014 to kick off with gusto, but have been surprised at how much slower it has been. Although at least six deals are in the pipeline (see below), only two in the capital markets so far this year could be deemed part of the CMBS family: BNP Paribas’s €135m bond issue for Italian REIT Immobiliare Grande Distribuzione, really a private placement; and Intu’s £110m note tap issue secured by the Trafford Centre.
This is not because of lack of investor interest, but for other reasons, the most important being that the loan market is so competitive that it has been hard for banks to find large enough loans for a single asset CMBS, or to accumulate enough loans for a conduit. Some German banks are out-competing everyone on prime assets. There are also a lot of equity buyers, especially very active UK institutional investors.
“Although liquidity has come back there’s not a big flow of debt deals,” says one debt broker. “If you want to build a conduit of even three or four loans, the number you have to bid on to win is significant.” To fit the bill, loans would have to be recently originated and all of a similar credit quality. The market is still risk averse. Says the broker: “Loans must be of a certain quality not necessarily German multi-family or prime, but a portfolio with good lease lengths and reasonable tenant diversity.” Rating agencies in Europe have yet to tackle anything more exotic than single asset/borrower deals, or failsafe German housing.
STRUCTURING TAKES LONGER
Not all borrowers who embraced CMBS before the market crisis are keen to accept it again. According to one legal adviser, another factor is that as the market re-invents itself, “people want to spend more time structuring a deal and getting it right. This may take four or five months now; in the past it took six weeks.” Forecasters may have to cut their optimistic predictions of 2014 European CMBS deal volumes reaching €10bn-€15bn, now that German housing refinancings are out of the way. “We may not reach the same levels this year because big German multi- family housing deals, with lot sizes of around €1bn, dominated last year,” says the adviser.
But the lull is deceptive, with significant new issuance likely in the second half of this year. Several banks, including Goldman Sachs, Bank of America Merrill Lynch and Deutsche Bank, have for some time been working on securitisations (see below). Also said to be testing the waters are JPMorgan and Morgan Stanley, which have rebuilt their loan origination platforms and are looking for product. HSBC and Lloyds are also open to the concept. These banks and those close to them expect new issuance of between €5bn and €6bn and identify at least six new potential deals.
Deutsche Bank led the way in re-opening Europe’s CMBS capital markets and is working on a securitisation of Westfield’s Stratford shopping centre in east London. BAML, which sold two €1bn-plus CMBS deals last year for German multi-family housing investor Gagfah, wants to securitise its loan to US private equity investor Apollo, secured on secondary ‘Project Moon’ assets. “All it takes is one bank to do three deals of €500m to €700m each,” says one loan servicer. The legal adviser expects to see issuance this month. The Barcelona Global ABS conference in mid June is seen as a good line in the sand, says one rating agent: “Banks will be aiming to get pre-sales out.”
NOT ENOUGH PRODUCT
Investors want to see new and more varied structures, as there is not enough product out there. Those that bought into German housing deals complain of not getting as big an allocation as they wanted. “Sovereign debt is low-yielding so they’re desperate for AAA; they’ll take almost anything,” says the legal adviser, who cites the demand for Goldman Sachs’ €363m Italian Gallerie CMBS, which priced at the tight end of guidance in November.
“A lot of people were surprised an Italian CMBS was possible,” he says. “It seems to have triggered a wave of opportunities.” However, some believe the deal’s success may have been overstated. “The sales process was incredibly long and detailed, and relationship favours were called in,” one source says. “It was a big effort to get done.” Others say that this is because the first deal is always the hardest to get away. “When 20 or 30 deals are in the market, will investors want all of them?” the source asks. “Regulatory changes will cap the ultimate amount that can be invested in CMBS, but we’re a long way short of that.”
DEUTSCHE BANK IN POLE POSITION AS SIX ISSUES AFFECT STARTING GRID
About six potential CMBS transactions are believed to be in the pipeline, at least one of which will be a multi-borrower issue. Two or three of these are set to reach the market before the summer. One up-and-coming deal with potential to move the needle is a securitisation of debt tied to Europe’s largest urban shopping centre: Westfield Stratford in East London. Crédit Agricole is working with Deutsche Bank to put together what is thought to be an agency deal. “It is still a moving target [but] you can assume it will be at least £550m,” according to one rating agent.
Crédit Agricole, one of Westfield’s leading relationship banks, was joint lead arranger with Eurohypo and HSBC of a financing of this size in 2011 — when debt was much more expensive, even for prime assets and sponsors. The 1.9m sq ft centre was valued at £1.74bn in December 2010 when Westfiled sold 50% to APG and CPPIB. The aim of the refinancing is thought to be to lower the cost of debt rather than increasing the leverage.
In the next two to three weeks, Deutsche Bank is separately bringing to market the first multi-loan deal since 2007 — a CMBS of around €300m secured against Italian assets — and is working on another CMBS issue involving Dutch properties. Goldman Sachs has two deals under way, one of which is its second Italian CMBS, secured against a group of Blackstone properties. These include the Franciacorta Outlet Village Rodenegg Saiano in southern Italy, which the US private equity giant bought last September from Aberdeen Asset Management’s former Degi funds.
Blackstone financed the €126m purchase with debt from Goldman Sachs. The US bank is said to have hired Allen & Overy to advise on a Dutch and German hotel CMBS involving assets believed to form London & Regional’s €650m-700m Accor portfolio. Eastdil Secured has been running a process to refinance the portfolio, code named Project New Day.
Meanwhile, this summer Bank of America Merrill Lynch plans to market a securitisation of the five-year, £260m, 65% loan-to-value debt it recently provided for Apollo Global Management’s purchase of Project Moon. Apollo bought the UK portfolio from Aviva Commercial Finance, which began working out its problem loans in earnest last year. Moon includes 135 secondary properties with a retail bias.