ANZ Investment Bank will later this month take to more than A$1 billion the value of commercial mortgage-backed transactions undertaken in the Australian market during the last 12 months when it launches the biggest yet seen in the sector - a A$500 million deal for listed property group Mirvac.
Although still small, the Australian CMBS sector is growing, and developing in sophistication, quickly enough to encourage hopes that it will soon offer genuine diversification in a market overwhelmingly focused on residential mortgage assets.
The Mirvac transaction will be the sixth CMBS since the middle of last year an unprecedented level of activity for the sector - and commercial property professionals believe the surface has barely been scratched. Many estimate the market to be worth at least A$2 billion a year.
But as the top end of the market develops, concerns are emerging among professionals and regulators that securitisation could be applied in the mid-market sector with less professionalism than the practice requires. This is particularly the case where deals are conducted by boutique property financiers, rather than by banks and investment banks with a thorough grounding in the market. The most widespread fear is that securitization structures will fail to effect an adequate transfer of risk.
ANZIB has largely made the running in CMBS deals, leading the first major transaction two years ago - a A$215.2 million shopping centre securitization for property group Leda. The deal's success laid the groundwork for the five that have taken place since the middle of last year: the securitization of Qantas Airway's A$160 million global headquarters in Sydney; a A$133 million transaction for retailer David Jones; a A$224 million transaction for Macquarie Office Trust (widely regarded as the best securitization of its kind last year); most recently, a A$150 million deal based on ABN AMRO's Sydney office building; and, soon, the Mirvac deal.
Although the Mirvac deal has been expected since early in the year, few details have been released other than that the financing will consist of five-year fixed-rate bonds and that 26 properties will comprise the underlying assets - easily the most diverse as well as the biggest commercial property pool yet securitised. Mirvac, in common with the large number of property trusts that have accessed the vanilla corporate bond market, is reducing bank debt. Finance director Dennis Broit has said that the funds raised would replace most of the group's A$547.6 million bank debt and reduce borrowing costs by more than 10 per cent.
Standard & Poor's has assigned a preliminary AAA rating to the structure, which will issue through Mirvac Capital Pty Ltd. The properties, which include office, retail, industrial and hotel buildings, are held variously by Mirvac Property Trust and Mirvac Commercial Trust.
From a marketing point of view, it will be interesting to see how the structure accommodates the risks posed by the number and variety of underlying assets, and how investors react to it.
Investors have already gained some experience in securitised multi-asset pools. Macquarie Office Trust, for example, bundled all but two of its 18 modern, investment-grade buildings into its deal. The transaction consisted of a single tranche of Class A senior notes rated AAA by S&P with a scheduled maturity date of September 15, 2003 and final maturity 18 months later.
The notes were interest-only, creating significant refinancing risk at the end of the initial term. Marketed at 34-36 basis points over the one-month bank bill swap rate, they offered a coupon pick-up of 80 basis points if not repaid in full in 2003. The structure allowed for the trustees, in the event of refinancing problems, to liquidate properties within the 18 month window before final maturity.
Among the positive qualities cited by S&P in support of the rating were the average 4.5-year expiry of the office leases and the high renewal rates. The 35.2% loan-to-valuation was conservative compared to the 38% regarded as consistent with AAA; likewise the debt service coverage of 2.4 times (assuming interest rates of 10.5%) compared favourably to the minimum 2.2 times required by the rating.
The negatives included the refinancing risk; the ability of trust unitholders to wind up the trust or amend its constitution; the program's ability to issue additional Class A and subordinated notes, and the exposure of rental receipts to market and lease-maturity risk.
These were mitigated, respectively, by the 18 months before final maturity; onerous unitholder voting requirements; a clause restricting issue of additional notes in the absence of affirmation by S&P that the rating will be unaffected; and the diversity of tenants and their rollover profile.
In the event, the deal priced at 35 basis points over BBSW, squarely in the middle of the targeted range and representing a four basis points premium over the nearest comparable deal. The arrangers described the pricing as a "good outcome."