"No one’s really brought a CMBS deal for primary issuance since June or July," says Peter Ireland, managing director at Morgan Stanley in London. "People have done deals for ECB repo, there has been decent volumes in the secondary market, spreads obviously have moved out, but people are still buying."
Deals that have emerged so far, including DECO 17 from Deutsche Bank and Windermere XIV from Lehman Brothers, are seen more as an indication of banks’ desperation to offload risk from their balance sheets than the return of the market.
"I don’t think the appetite is there for the entire capital structure," says Michael Cox, real estate analyst at Royal Bank of Scotland in London. "In terms of the CMBS market, banks want to get deals off their balance sheets by year-end but the market can’t take it all."
Many of the investors previously active in European CMBS and asset-backed securities have retreated for the time being. Some market participants estimate that nearly 50% of European ABS investors are sitting on the sidelines until the market shows signs of recovery.
Banks are not widely advertising what they are doing with the commercial real estate loans they originated with the intention of securitizing them. There seems to be a consensus, however, that some CMBSs have been structured and held on the balance sheet for repo purposes.
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"I would expect deals to be restructured to be more investor-friendly" |
"The recovery will be slow and messy," says Hans Vrensen, director and head of securitization research, Europe, at Barclays Capital in London. "Right now, bonds that are created and rated may be sold at a discount to investors. But no one wants to make a public statement saying they sold bonds at a discount." In the meantime, banks are rethinking CMBS structures to make them more attractive to wary investors. DECO 17, for example, which was originally marketed earlier this year, has been restructured. Originally a €2.235 billion deal backed by multi-family property assets in Germany and Sweden, the relaunched version is smaller – €2.039 billion – and features loans with lower loan-to-value ratios (75%).
"I would expect deals to be restructured to be more investor-friendly," says Vrensen. "Previously we had seen deals creeping toward being more ‘efficient’ structures. That should change to make deals more palatable to investors. Investors shouldn’t be afraid to say what they want in deals."
Scant details
Details available on the transactions that have emerged, such as DECO 17 and Windermere XIV, have been scant when it comes to the capital structure, security package and price guidance, for example. One thing is certain, however, deals are going to be more expensive for banks to execute and investors will be choosier about what they are willing to buy.
"If people were lending in the high 90s loan-to-value I think there is cause for concern," says Ireland. "There’s going to be much more differentiation between transactions. People with lower-leveraged deals are going to be fine."
Without any public deals to go by, analysts believe triple-A-rated CMBS paper will price at 55 basis points. Compare that with the situation just a few months ago when similar paper was pricing in the teens. Even though CMBS paper might look to be better value than it was a few months back, investors remain standoffish. This lack of interest has led some analysts to believe that banks are only able to sell parts of the capital structure – triple-As mainly – and are keeping the rest to sell later.
"We’re not entirely sure who’s buying deals," says RBS’s Cox. "I question whether banks are able to sell much paper."
Where, then, is the paper going? There has been much discussion of so-called distressed funds raising money to invest in impaired CMBS and ABS paper. In addition, banks have reportedly been turning to the leveraged loan market to unload commercial real estate loans.
"The syndicated market is smaller and more discerning," says Ireland. "A lot of the structures that were underwritten for CMBS at the height of the bull market are not necessarily going to gain favour with the bank market. The highly leveraged loans, or big portfolios, are not the most liquid pieces of paper."
It might also be that the talk of distressed fund launches will not match up to reality. Certainly, whatever new demand there is from distressed players, it hasn’t been enough to spark a recovery in spreads. On the other hand, action in the secondary market has been brisk as investors hunt for bargains on more seasoned paper dumped by structured investment vehicles.
"There is a lot of paper in the secondary market that’s cheaper, older and perhaps better protected than loans originated very recently," says Cox.