Commercial mortgage backed securitisation (CMBS) issuance in Europe reached €5.2bn in 2015, data compiled by Bank of America Merrill Lynch (BAML) shows, with the investment bank’s ABS research team forecasting between €5bn and €10bn next year.
Annual deal flow, across 16 public, private and retailed CMBS deals, came in at the bearish end of issuance forecasts from this time last year – at €5bn – and equal to last year’s annual tally across 13 deals.
This year’s issuance volumes reflect a considerable reduction on the annual volumes recorded by Concept ABS for 2013, the supposed year of the ‘mini CMBS revival’ when issuance reached €8.8bn across 13 deals. Concept ABS data excludes privately-placed bonds sold in a CMBS-like format.
This follows a difficult summer for asset backed securities (ABS) which led to spreads widening preventing profitable capital market executions.
Around three or four deals were expected to come to market before year end – including Deutsche Bank’s Portuguese loan deal dubbed ‘Ruby’ and a UK hotel-backed transaction – but stalled. Currently, no more deals are anticipated to close by year end.
BAML is the first of the investment banks to publish its CMBS outlook, forecasting between €5bn and €10bn.
“Even in a year where spreads whipsaw during the year there is capacity to issue €5bn of CMBS, to our thinking. In a more benign macro and credit market environment we think CMBS issuance could be closer to €10bn, although it is not clear to us that market conditions are likely to be less challenging in 2016 than in 2015,” BAML’s CMBS team wrote.
“Recently originated loans with higher margins could restart the CMBS primary market in 2016,” BAML’s 2016 ABS Outlook continued.
Rating agencies are understood to be working on several transactions for early next year. DBRS predicts European CMBS issuance next year likely to be between €5bn and €6bn.
This year’s difficult summer for CMBS was primarily macro-driven, coupled with long term regulatory burdens on the asset class which serve to undermine the competitiveness of securitisation, relative to direct lending from insurers and debt funds.
The re-inflamed crisis in Greece, the Chinese stock market collapse in the summer as well as the enduring moribund Eurozone economy spilled over into risk averse sentiment in banking markets which led to a tightening in asset backed securities (ABS) pricing across the board.
New issuance CMBS spreads in the latter half of the year were not immune.
These macro headwinds, together with increased competition in bilateral senior commercial real estate lending markets, caused the spread gap between CMBS and underlying loans to diminish to a level where CMBS exits broke-even or were straight unprofitable for the issuing banks.
This dynamic worsened as the year went on as is illustrated in three of the year’s four deals in H2: Goldman Sachs’ £646m Logistics UK 2015 plc and €181.95m Reitaly Finance CMBS and BAML’s €145.8m Taurus 2015-3 EU DAC.
These deals are a reminder how difficult it can be to correctly price loans for capital markets execution during periods of broader macro volatility which can lead to CMBS spread widening due to non-real estate factors.
In addition, Deutsche Bank failed to re-securitise the Goldman Sachs-issued Gallerie CMBS, due to poor investor appetite during the summer period, in a transaction dubbed Crescendo.
Earlier, in late April, Royal Bank of Scotland’s attempted return to CMBS new issuance ended in failure after little demand was received for its £171.1m five-year Antares 2015-1 CMBS, secured by Kennedy Wilson’s 20-strong UK Jupiter portfolio formerly part of the FOX 1 Fordgate CMBS.
RBS’ transaction pre-dated the macro headwinds and the causes of its failure to execute were instead more esoteric relating deal structuring and the quality of the underlying property portfolio, relative to the loan margin, at just 180 basis points above three-month LIBOR. RBS is believed to have retained the Antares 2015-1 CMBS bonds.
In a presentation by DBRS which covered issuance outlook for European CMBS, the rating agency stated the market is facing “short-term challenging conditions with CMBS spreads often exceeding loan spreads”.
“Regulatory developments remain crucial for the future of European CMBS,” DBRS also stated in the same presentation.
This point by DBRS is crucial. Regulatory developments have left CMBS uncompetitive. For example, capital charges for CMBS in Solvency 2 which “heavily promote insurers’ direct lending,” according to DBRS.
In addition, there are higher due diligence requirements for CMBS compared to bilateral CRE loans. To offset these higher regulatory costs CMBS, theoretically, should provide a yield pick-up, but in an increasingly competitive market – where even debt funds are emerging as an alternative to CMBS, this remains difficult.
There were some positive highlights in 2015 for the market, as highlighted by Concept ABS, a European ABS primary market resource, which points to “a break-through year for European CMBS in several ways”.
Concept ABS stated: “In March, Deutsche Bank brought the first fully marketed post-crisis Irish CMBS (Harp) and in June JP Morgan sold the first multi-jurisdictional CMBS (Mint) since the start of the crisis, the transaction featuring a genuinely unique dual-currency cross-collateralised structure.
“Finally, in July Deutsche brought the first CMBS not only to securitise more than one loan from unrelated borrowers but also to straddle jurisdictions (Charlemagne) – in short looking much like the conduit deals that were ubiquitous pre-crisis.”
Concept ABS added that in 2015 European accounts have been offered a much record post-crisis geographical spread of collateral, with the 10 placed deals featuring properties from a total of seven countries: Ireland, Belgium, the UK, Italy, Holland, France and Germany.