Santander has issued a £916.8 million (€1 billion) commercial real estate loan securitisation, in one of the first synthetic transactions of UK commercial property assets since the financial crisis.
The issue, dubbed Red 1 Finance CLO 2017-1 DAC, is a portfolio securitisation of 25 UK commercial real estate loans, which are secured against 144 commercial properties.
The bank said the deal was structured as a collateralised loan obligation and that it was specifically structured as a synthetic transaction to allow the portfolio and the servicing to remain with Santander “to limit any impact on clients”.
The deal comprises the synthetic transfer of credit risk from Santander to the issuer via a credit protection deed, according to a report by ratings agency Moody’s. A synthetic securitisation does not transfer the assets but uses a privately negotiated derivative to transfer risk.
“As we move into 2018, following a successful year, we are looking forward to strong growth and will be increasing our appetite for real estate lending,” said Andrew Whelan, Santander’s real estate finance managing director.
“Red1 assists us in continuing to support new and existing clients in meeting their financing needs,” Whelan added.
The security of around half of the loan pool is located in London, while office and mixed-use properties dominate the real estate collateral, according to Moody’s.
The pool has a significant exposure – 21 percent of the current balance – to the London office market sector, which has been negatively affected by the Brexit vote, Moody’s said. In addition, more than 18 percent of the portfolio consists of loans exposed to properties under development.
“The quality of the loans differs materially,” Moody’s said, “the strongest loans are, in our view, unlikely to experience any loss, while the weakest loans in the pool have an expected loss of around 10 percent.”
Moody’s Investors Service, which has valued the property portfolio at £4.3 billion, has assigned the following definitive ratings to the tranches of the credit protection deed between Santander and Red 1 Finance CLO 2017-1 DAC:
• £696.748m Tranche A, assigned Aaa (sf)
• £68.758m Tranche B, assigned Aa2 (sf)
• £41.255m Tranche C, assigned A2 (sf)
• £22.919m Tranche D, assigned Baa1 (sf)
• £25.210m Tranche E, assigned Baa3 (sf)
• £22.920m Tranche F, assigned Ba2 (sf)
All loans carry a floating rate of interest. Four loans, accounting for 18.5 percent of the current balance, are unhedged, while the remainder are either partially or fully hedged. The maximum maturity date of the loans is 4.3 years after closing, while the weighted average senior loan-to-value is 47.6 percent.