Deutsche Bank has just issued initial pricing guidance for the securitisation of the €679.9m loan secured by a portfolio of 29 German offices owned by IVG Immobilien.
Initial pricing guidance for the six-tranche DECO 2014 BONN CMBS is as follows:
CLASS SIZE (€m) Rating (S&P/Fitch) COUPON LTV WAL
- A 330.0 AAA /AAA 3m€+100bps 33.5% 4.7
- B 50.0 AA+/ AA+ 3m€+130bps 38.6% 4.9
- C 77.0 AA/ AA- 3m€+160bps 46.5% 4.9
- D 92.0 A / A- 3m€+190bps 55.8% 4.9
- E 89.0 BBB/ BBB- 3m€+300bps 64.9% 4.9
- F 41.9 BB+/ BB 3m€+400bps 69.1% 4.9
The closure of DECO 2014 BONN transaction will take the annual transaction volume for European CMBS to €3.5bn, and to €4.2bn when privately placed CMBS-like bonds are counted.
Whichever figure is adopted, the annual volumes are more than half the issuance of 2013, when €8.2bn was closed in 12 transactions. Next year, analysts predict an upswing in total issuance again, with forecasts of up to €8bn for 2015.
The origins of Deutsceh Bank’s latest securitisation date back to August 2014 when the Court of Bonn approved IVG’s insolvency plan that included a debt-for-equity-swap of about €1.8bn of bank debt and a waiver of a subordinated €400m hybrid bond.
The following month, Deutsche Bank refinanced IVG with €1.5bn in fresh debt across two loans, in a process dubbed Project Surrogate. The loans were: the €805m AG Facility and the €680m core facility, the latter of which is the loan securitised in the BONN transaction.
Deutsche Bank completed the syndication of the €805m AG Facility around six weeks ago.
The five-year €680.0m IVG Core Loan was funded by Deutsche Bank the on 30 September and is secured by 29 offices throughout Germany valued at €983.66m, according to a December 2013 Cushman & Wakefield valuation.
This reflects a 69.1% LTV or €1,349 per square metres. The loan was priced at 240 basis points over three-month Euribor.
In its pre-sale report, S&P wrote: “None of the borrowers of the Core loan have been insolvent, and their assets have not been subject to IVG Immobilien’s insolvency proceedings. However, the intercompany liabilities of the borrowers to IVG and its subsidiaries were restructured in the context of IVG’s restructuring.
“If the restructuring were to be challenged, the resulting intercreditor liabilities of the borrowers would be unsecured and would rank behind the issuer’s secured claims.”
The IVG Core Loan amortizes by 5% over its term. Its event of default covenants are triggered at an 80% LTV ratio, or a 1.05x debt service coverage ratio (DSCR). A 1.15x DSCR would trigger a mandatory cash trap.
Bank of America Merrill Lynch (BAML) provided the interest rate swap, and has been given joint billing on the deal as co-arranger and lead manager. Royal Bank of Canada provided the swap cap. BONN matures on 31 October 2009, with a legal final maturity five years later.
As a true sale CMBS transaction, Deutsche Bank will retain 5% of each class of notes. Deutsche Bank has also provided a €50m liquidity facility, which is available to pay interest on the notes.
The majority of assets located in Stuttgart, Frankfurt, Hamburg and München, each comprising 28.6%, 24.1%, 15.5% and 13.9% of the Portfolio market value, respectively.
There is a concentration of value in the four largest assets – Theodor-Stern-Kai 1 in Frankfurt, Buschlestraße1/ Reinsburgstraße 26-34 in Stuttgart, Fritz-Schäffer-Straße 9 in Munich and Uhlandstraße 2 in Stuttgart – which together account for €603m, or 61.3% of the property portfolio’s value.
All four assets are either fully or majority let to Allianz Deutschland AG, accounting for €37.2m, or 54.9%, of the entire property portfolio’s €67.7m annual gross rental income.
Fitch Ratings wrote in its pre-sale report: “Asset quality is one of the main drivers of the ratings. The portfolio securing the loan is generally of sound quality and well-located in the top seven German cities. Some of the assets are dated and may require refurbishment but should still attract occupier interest because of their attractive locations.
“The dominance of the anchor tenant is both a benefit as well as a risk for the transaction, with around 55% of income derived from Allianz SE over an average of seven years. This should support loan performance over its term, although as leases roll off concomitant re-letting risk will affect recovery value.”
One property in the underlying portfolio is in the process of being sold – Neue Weyerstraße 6 – slated for this month, with a further three disposals in IVG’s business plan.
Together the four properties are worth €39.7m. Assuming sales at market value and a 100% release price, this would reduce the BONN transaction’s unpaid balance to €652.7m when completed.
The combined weighted average unexpired lease term (WALT) on the four Allianz leases across the portfolio is 7.4 years to first break and 8.2 years to expiry which Deutsche Bank cites provides significant tail period beyond the Core Loan’s five-year term.
At the full portfolio level, the last of recent asset management by IVG is reflected in the property portfolio’s low WALT, at just 5.7 years to first break and 6.3 years to expiry.
“We consider that the assets can sustain net cash flows of €53.1m in a ‘B’ (or “expected case”) rating scenario,” wrote S&P in its pre-sale report. “This would imply an initial interest coverage ratio of about 2.5x. Our net recovery value for the portfolio is about €794m, representing a 19% discount to the open market valuation.”
The S&P pre-sale report continued: “Excluding Allianz Deutschland, the remaining leases are short-term in nature. This exposes the transaction to re-letting risk, while the portfolio is over-rented in our opinion. However, with Allianz Deutschland contributing more than half of the portfolio’s income, term risk is mitigated.”
Situs Asset Management, which was put up for sale by its owners in October, has been appointed primary and special servicer.