Depth of investor demand encourages banks to sell chunks of loans, reports Lauren Parr
Banks may have a lot of debt to sell before the year is over but they have the ball in their court thanks to the weight of money targeting secondary loans.
“Loan sellers are sometimes seeing more potential buyers than they need, therefore banks may elect the ones that they are comfortable they can execute with,” according to Bertrand Carrez, global head of real estate at French fund ACOFI Investment Management, which invests in senior debt.
The syndication market has recovered in the past 18 months, with many new entrants, plus big investors like AXA Investment Managers – Real Assets raising more capital. For funds, it’s a way to achieve portfolio diversification; for banks it’s a way to access deals they might have lost out on or don’t have the origination teams to access.
Lately syndication has become an easier sell than CMBS (see pp26-28). Fuelling activity on the other side of the equation is a rise in loan origination and banks’ requirement to free up balance sheets.
Alternative to securitisation
“Banks are finding it difficult to reduce books through securitisation, making them increasingly reliant on syndication,” says Cyril Hoyaux, head of debt funds management at AEW Europe, which has a pan- European senior debt fund.
Investment banks looking to sell all or most of their positions account for much of the market, their strategy increasingly based on finding deals for buy-side clients as more investors enter the market.
The other main vendors are French, German, Dutch or UK commercial banks, which keep a chunk but sell a portion to spread risk.
“Competition intensified in 2014 in many loan syndication processes run by investment banks,” Matthew Pritchard, portfolio manager at alternative investment manager Aalto Invest, says, explaining why it now favours bilateral lending. “We still find value in clubbing with commercial banks, where the motivation for selling is risk mitigation. They value you more as a partner.”
Syndication strongly depends on general credit conditions, which have widened by 20-40 basis points since the summer. “Banks are inclined to syndicate because it’s more expensive for them to borrow to fund loan portfolios,” says Andrea Vanni, Deutsche Asset & Wealth Management’s European real estate debt investment head. “It now makes sense to sell some debt it was profitable for them to hold at the start of the year.”
Those that have hit their targets in the first half are also more likely to syndicate.
Typically, banks go to funds they have a relationship with or a couple of other traditional lenders. They may also be governed by borrowers’ stipulations on which parties they can syndicate to – big investors frequently have ‘black lists’, which may include hedge funds, for example.
“Control is very important; we’ve all been on the back end of people we didn’t want [to be indebted to],” Tishman Speyer UK MD Dan Nicholson told Real Estate Capital’s Europe Forum 2015 last month.
Half the time syndicating banks approach Deutsche AWM; the other half it will contact the mandated lead underwriter on loans it has bid on, promising to buy in quickly (typically the process takes two to three months), having already conducted due diligence. On big deals where it knows the lender, it might ask if it can take a portion.
The direct approach
Others reach out to sponsors directly, before calling banks to co-arrange. Debt advisers are also useful in putting together alternative deal types.
By and large, buyers’ priority is quality of the property and sponsor. “Before we look at a loan agreement or who’s in a deal we undertake a thorough analysis of the asset and local market,” Pritchard says.
Sponsors “are always important, but it depends on how intensive the asset management is,” he adds. “If it’s a straight- forward, stable, long-let central London office, sponsor track record is less important; if it’s a shopping centre, specialist assets or a major repositioning, it’s crucial to know the manager has the requisite skills and experience.”
Documentation is the second layer. “Well thought-out and conservative covenants are crucial to protect our position,” Pritchard says. “Sometimes we like the assets but think the covenants are too relaxed, so we’ve passed on deals.” It is becoming common for lenders to provide a 60% loan-to-value ratio but an 85% LTV default covenant with no cash trap (money borrowers set aside to cover any shortfalls in an asset’s income).
Lending partners are the next consideration. Vanni says: “We strongly prefer to work with banks we know and have a good relationship with, as if things go wrong, especially if we’re holding a large amount of the overall debt, it’s important to have a good consortium of lenders that act in the same way we think.”
Alignment of interest with an agency bank is a factor ACOFI is particularly sensitive to, as it “has to demonstrate to investors that the bank arranging the financing is comfortable with that risk”, says Carrez. So it will expect the seller to keep a big stake in the loan.
As a senior lender, AEW will not compromise on a full security package including a first-ranking mortgage. It could be a deal breaker if it considers the LTV ratio to exceed what is shown in a teaser or if the margin is too low.
One of Hoyaux’s concerns is logistics or light industrial portfolio financings, where leverage is above 65% and margins are below 200bps, because he believes that “does not pay the risk”.
Newcomer Qatar National Bank London has declined deals because “returns were not acceptable”, says Arthur Jennings, relationship manager in QNBL’s corporate banking team.
Underwriting banks typically retain more than half the arrangement fee (sometimes all of it) and may also take a skim on the margin, but risk putting syndicate investors off deals if they skim too much. “When we started investing in syndication in early 2013 we bought the odd loan with no skim; today the economics passed on through good deals can be much too low,” says Pritchard.
Jennings says QNBL is “less concerned about skim being taken from the original deal, as long as pricing and return is workable”. But it questions institutions that claim it is their policy not to pass fees on.
Overseas banks vie with debt investors for slice of syndication pie
Different types of debt buyer are looking to buy different syndication positions, from core, senior players seeking prime, low-margin debt in the UK, like Sumitomo Mitsui Trust Bank (SMTB) and Shinsei Bank, to pan-European players such as MünchenerHyp.
Guido Zeitler, the German bank’s head of international debt investments, says its perfect deal is one backed by “a city asset with a bit of refurbishment or letting risk, at a 55-60% loan- to-value ratio, with a mezz lender on top of us”.
AXA IM targets big deals, preferably yielding above 250bps, while Aalto seeks smaller positions yielding 300bps or more. At the top end are the likes of BlackRock, which bought €100m of mezzanine debt as part of a €650m Citigroup loan for Ceberus’s ‘Project Blue’ (see table, p29). Large institutions such as Prudential, Capita and M&G are very active, particularly in the high-yielding, loan-on-loan finance part of the market.
Bank participants “are far from dead”, ING head of CRE syndication Jean-Maurice Elkouby adds, and are the Dutch bank’s main source of liquidity for debt it has sold in Poland.
Larger players can secure better allocations for themselves, says one market participant. “If it is a £50m-70m loan it is easier for banks to sell to one counter party than to try to find multiple participants to share the loan, so larger ticket buyers can have an advantage.”
Asian banks, particularly from China and Singapore, and Middle Eastern banks, all following investor clients, are new on the roster of banks and debt funds eyeing European loan pieces. Bank of China has “led the charge”, says one syndication manager on the sell side, looking at a €650m ING/CIB Natixis loan for China Investment Corporation’s and AEW Europe’s acquisition of the Celsius French, Dutch and Belgian shopping mall portfolio.
Other Asian and Middle Eastern banks, including the Bank of East Asia and Qatar National Bank London, are just arriving in the London market, from where most banks’ European selling is conducted.
QNBL relationship manager Arthur Jennings says: “We see the syndication market as an ideal step towards gaining greater exposure to non-Gulf Cooperation Council corporate debt, which is typically a difficult market to penetrate for smaller banks.”
It has received approaches from Citi, ING, Goldman Sachs, Barclays and Lloyds, which it has worked with on club deals this year.
The likes of Agricultural Bank of China is said to be “green in the area of real estate” but open to Chinese sponsors.
Japanese banks such as SMTB have been around longer “as a way to make yield somewhere”, the syndication manager says, at a time when their domestic market is flooded with cheap liquidity, with margins as low as 20bps. SMTB and Shinsei Bank formed part of a four-bank line up that took positions in ING’s £365m financing of London’s ‘Gherkin’.
But not all are in the market for ‘clean’ pieces; Japan’s Aozora Bank, owned by Cerberus, seeks slightly higher-yielding debt.