With 11 deals closed so far this year, according to S&P Global Ratings, Europe’s commercial mortgage-backed securities market has had its best year – by number of issuances – since the global financial crisis.
In the latest test of investor demand, Deutsche Bank and Société Générale in November issued the first post-crisis transaction with significant exposure to French commercial property. Arrow CMBS 2018 securitises 95 percent of a €308.2 million senior loan backed by a logistics portfolio, with additional exposure to Germany and the Netherlands.
The deal’s €135.8 million ‘A1’ tranche priced at 110 basis points over three-month Euribor, reflecting a widening in spreads in recent months; a trend seen across the wider asset-backed securities market. In July, the highest-rated notes in deals were seen as low as 75bps.
The Arrow venture has had a positive outcome in the view of Bhavesh Patel, head of CRE capital markets and distribution at Deutsche Bank. “We are happy with the pricing outcome, given the market circumstances, with more volatility seen recently,” Patel says. “There has been some widening [of CMBS yields] and we expected that it would also be reflected in Arrow,” he adds.
The rare notes, giving CMBS investors exposure to a deal backed primarily by the French market for the first time since the financial crisis – whereas there has always been an active market for syndicated bank loans collateralised by French real estate – was another factor thought to impact investors’ expectations for a pricing premium over more familiar deals, according to Laurent Mitaty, co-deputy head of asset backed products at Société Générale Corporate & Investment Banking.
Arrow’s €19 million ‘A2’ tranche was priced at 120bps, while the €23 million ‘B’ and €29.3 million ‘C’ tranches were priced at 150bps and 205bps, respectively. The €32 million ‘D’ tranche was priced at 270bps; while the €32.7 million ‘E’ and the €20.9 million ‘F’ notes were priced at 340bps and 475bps; these last two at the tight and wide end of the guiding pricing, respectively.
Deutsche Bank, which was an active participant in the original post-crisis revival of European CMBS between 2011 and 2015, had so far this year arranged a single deal; an agented transaction for Blackstone. For SocGén, Arrow represented a return to European CMBS since the crisis.
“While we have an active CMBS franchise in the US and an active commercial real estate lending franchise in both Europe and the US, we had not issued CMBS in Europe prior to this one in recent years. Up to today, we had a potential number of good candidates for European CMBS deals identified in recent years, with the right sponsor and the right portfolio, but it was always a context where the market didn’t make sense from the pricing perspective, so it was more efficient to syndicate,” says Emile Boustani, director, asset-backed products at the bank.
“What changed with this transaction is that we have a different market context. As evidenced since the beginning of this year, we have seen a number of other banks issuing CMBS in Europe, and the reason for that is, finally this year, the pricing mechanics favoured CMBS,” Boustani adds.
Mitaty notes that a genuine revival of the European market would depend on pricing more than investors’ demand. “The technology is ready, the quality of the underlying assets is there, there’s investor appetite; it’s only a matter of price, either CMBS prices stay low or the banking space needs to price loans more expensively, which would make CMBS competitive again for the needs of certain borrowers.”
Many securitisation players are optimistic about the revival of Europe’s CMBS market, with Trepp expecting a total 2018 volume of as high as €4.4 billion. The return of Europe’s CMBS market needs to be seen in perspective, though. The recent ramp-up of deal activity is still far from the €47.3 billion issued in the peak year of 2006, Trepp’s data show.
“The European CMBS market has been reviving, arguably from a low level in 2016 and 2017,” says Christian Aufsatz, head of European structured finance at DBRS, adding that, for the first time since 2007, the number of issuances has been in the double digits. Real Estate Capital understands some key deal arrangers currently active in Europe are committed to issuing new transactions next year, providing that spreads are priced tightly.
“We will still be keen on CMBS for 2019,” says one issuer operating in Europe who asked to remain unnamed. “The form of those deals, however, is subject to some extent, to the market dynamics as well as macro factors.”