After setbacks, biggest Continental public CMBS since 2007 finally launches, reports Lauren Parr
The €754m Florentia German multi-family housing CMBS, which finally closed last month, wasn’t put together overnight; it was a slow burner.
Continental Europe’s biggest public CMBS issue since 2007 – and the first agency deal where the sponsor, not a bank, was the originator and retained 5% of the bonds – got under way at the same time as Deutsche Bank’s Chiswick Park securitisation, which reopened the CMBS market in June 2011.
But Florentia fell victim to volatility in the credit markets before it could be pulled off.
Then there was another twist: “Towards the end of last year, a big investor became uncertain about whether it would invest, because of ‘the beaching of a London whale’,” says a person that worked on the deal. JPMorgan was that investor – and the ‘London whale’ was a London-based trader at the bank who racked up a $5.8bn credit products trading loss.
At one stage, JPMorgan withdrew altogether “based on what was going on in the company”, the source close to the deal says. Essentially, the investment bank couldn’t get confirmation that it could close the CMBS deal in light of the hedging trade losses.
But it eventually came back to buy 75% of the bonds in what became FLORE 2012-1, at weighted average pricing of 300 basis points over three-month Euribor. The deal finally closed on 26 September.
The best refinancing option
Borrower Vitus Immobilien had decided against other refinancing options, such as the pfandbrief market, having watched Berlin housing group GSW being compelled to split its €890m refinancing among five banks. This would have probably secured Vitus a higher loan-to-value ratio of 65%- 70%, says one CMBS analyst; in fact, the LTV ratio tipped 63% and the deal ended up being smaller than had been anticipated.
The 25% of bonds JPMorgan did not buy were oversubscribed. Four other investors are understood to have bought bonds. Insurers, thought to include Aviva Investors, were mostly interested in AAA tranches; hedge funds (still big players in US CMBS, as they search for higher yields) took positions in everything below. M&G Investments took €151.6m of mezzanine exposure.
There were five rated senior tranches and published pricing for the five-year bonds ranged from 184bps over three-month Libor for the AAA tranche, to 792bps for a €50m BBB-/BBB-rated class, a loan-to-value ratio of up to 63.6% (see table). There are also two junior, unrated tranches, class F and G.
Market sources say the return was “pretty decent” for five-year money, particularly compared to the 165bps blended pricing across six classes borrower Deutsche Annington is offering noteholders in the proposed extension and restructuring of the €4.4bn GRAND multi-family housing CMBS.
“There is still huge demand for bonds; the question is how much can you place?” adds the source. He reckons half this size, easily, on a regular basis. “The way this priced, it worked well for investors and shows CMBS markets are alive, but perhaps not for €1bn-plus deals at this point.”
It was also significant that this was Europe’s first agency deal where the issuer company, rather than a bank, was the originator and satisfied the 5% retention requirements under the Capital Require-ments Directive (CRD).
Earlier it had been uncertain whether arranger Deutsche Bank would have to keep a portion of the bonds, given that the CRD rules are drafted in the context of RMBS, which presume a bank will make the retention. But Deutsche Bank did not have to do so in this case and it never took balance-sheet risk on the loan.
The deal marks significant changes to the typical servicer arrangements seen in CMBS deals before the credit crunch: most notably there is no controlling class. The two ratings agencies that rated the deal were torn in their opinions on this. DBRS was concerned that substantial control rights on maturity action could slow down the servicer’s ability to act.
But Fitch Ratings saw it as a positive, as the lack of a controlling class – which has been able to obstruct previous CMBS loan work- outs, even against the will of the majority of the noteholders – will keep bondholders involved. Instead a committee process would allow the servicer or special servicer to consult with the majority of the noteholders.
A plan for note maturity
Another new feature is inclusion of a note maturity plan, outlining a course of action six months before maturity of the bonds (October 2024 in this case) if there are still outstanding tranches. One CMBS analyst says this is to avoid the situation of Opera Uni-Invest, which in February became the first CMBS to default after reaching legal final maturity (see April and May issues).
The FLORE CMBS has a very long tail period for loan work-outs, from 2017 to 2024, compared with two to three years in previous deals. What’s more, an 8% cap protects the deal from big Euribor rises in the tail period, so the cost won’t rocket.
“This deal provides a precedent [by way of retention] and takes away a big obstacle to new securitisations being done on an agency basis in the future,” says the source.
He believes there is room in the capital markets for bigger deals, even though one investor took most of the bonds – especially since the banking market is dominated by German lenders that are individually lending €100m-250m on deals and don’t have the appetite to refinance big positions like this.
RBS deal makes five in reviving European CMBS market
There have been five publicly-marketed CMBS deals in Europe since Deutsche Bank re-opened the market in June 2011 with the DECO 2011-CSPK deal, after it had been shut down for four years.
Four were issued this year, though at least two of them, Merry Hill and the Florentia deal for Vitus, were originally slated for last year, showing how fragile and difficult the real estate capital markets remain.
The latest to be sold is part of Royal Bank of Scotland’s summer securitisation of the loan RBS made on its own Project Isobel portfolio. Within days of Florentia closing, RBS placed £290m of the outstanding £463m Project Isobel debt, which the bank had securitised as Isobel Finance.
There were £230m of class As, rated AAA and paying 255bps over three-month Libor; £60m of class Bs, rated AA, paying 425bps; and £173m of class Cs, rated BBB, paying 450bps. RBS placed almost all the class As and Bs, retaining 5% to satisfy the Capital Requirement Directive. CoStar reported that “a small number of traditional CMBS bond buyers” bought the notes.
It is thought the bank has no plans to sell the class Cs. Last month it also listed the equity it holds with Blackstone as tradeable junior notes.
Florentia CMBS: key facts and figures
- Sponsor Vitus Immobilien is owned by Aviva, Blackstone, Deutsche Bank, The Norinchukin Bank and led by Round Hill Capital.
- The collateral is almost 30,000 homes worth €1.5bn, mainly in Bremen (31.4% by floor space), then Kiel (29.2%) and Mönchengladbach (19.8%).
- As well as the securitised loans there is €207.4m of continuing senior debt, ranking in priority to all the other loans, and €152m of mezzanine debt, which was transferred from the borrowers.
- The securitised loans will amortise by 0.5% of the closing balance in years one and two; 0.75% in years three and four; and 1% in year five.
- A loan-to-value covenant in the event of a loan default will be in place at 80%.
- Cash trap mechanisms are included at a 73% loan-to-value level for 50% of the free cash flow and at a 76.25% level for 100% of the free cash flow.
- In the event of a default, a debt service coverage ratio (DSCR) covenant will be in place at 1.20x and a full cash trap will occur when the DSCR reaches 1.3x.
- Deutsche Bank is the liquidity and hedge provider, cash manager, agent bank and note trustee, as well as the deal’s arranger; Situs Asset Management is the servicer and special servicer.
- The refinancing repays the maturing Centaurus Eclipse CMBS.