Europe's innovative CMBS market is set to make further strides, with two landmark deals being marketed to European investors.

In the U.K., Morgan Stanley Dean Witter's highly successful property securitization team has structured a deal for supermarket group J. Sainsbury, which allows the originator much more flexibility than is possible under a traditional sale and leaseback deal with a property company. It is thought to be the first time that a sale and leaseback structure has been combined with a securitized bond issue.

The long-dated, fixed-rate transaction - called Highbury Finance - is set to launch in mid-March and will be worth GBP335 million ($526 million). It is set to receive A1/A ratings from Moody's Investors Service and Standard & Poor's.

"Under a normal sale and leaseback structure (originators) are quite restricted in the way they can do things," a Morgan Stanley official said. "With this, Sainsbury has more operational flexibility: they can redevelop, refurbish and extend stores, as long as they don't do anything that is going to diminish the value of the stores or affect the ratings of the bond."

The structure also gives Sainsbury the option to re-lease or buy the 16 stores that back the deal at the end of the 23-year term. Again, in a normal sale and leaseback deal, the purchaser of the sites would be able to sell or lease them to Sainsbury's competitors at maturity. Even if Sainsbury decides to sell the sites, they would retain an interest in the likely profit.

Another advantage is that instead of the five-yearly, upward-only rent reviews normal in traditional deals, the deal is structured with lease payments on the underlying stores fixed at 1% annual increased until maturity. Not only does that give Sainsbury certainty, it is also likely to mean rents rise well below rent rises in real terms.

This is possible because, with rating agencies assuming conservative forecasts for future rent, there is little benefit in incorporating upward-only rent reviews, as long as the cashflows will meet bond payments.

"There is quite a complicated structure behind this, which has never been used before," the Morgan Stanley official said. "It has taken a while for us to put the structure together, but it has given Sainsbury a huge number of benefits, whilst offering investors significant enhancements versus straight unsecured debt."

The structure uses three Netherlands-incorporated special purpose vehicles. According to a Moody's presale report, the proceeds of the Highbury Finance bonds are used to subscribe for bonds issued by SPVs called Avenell Property and Avenell Leasing. With the proceeds, Avenell Leasing will purchase the head leases of the properties and sub-lease the properties to Sainsbury, while Avenell Property will purchase a beneficial interest in the properties.

First Pan-European CMBS

Another landmark transaction - which was set for launch last week - is the first mult-jurisdictional European synthetic CMBS. The (1.381 billion ($1.33 billion) deal, called Europa One Ltd., is originated by Rheinische Hypothekenbank A.G. (Rheinhyp), German mortgage bank, and arranged and underwritten by Barclays Capital.

The deal uses a credit default swap structure linked to a reference pool structure linked to a reference pool made up of loans originated and serviced by Rheinhyp and secured on commercial properties in Spain, Germany, the Netherlands, Austria and France.

Prospective ratings from S&P and Moody's vary from vary from AAA/Aaa for three senior tranches (just over 80% of the deal), down to BB/Baa2 for the lower-rated tranche. Pricing will vary from around Libor plus 20 basis points for the 1.3-year A1 tranche down to about 150 over for the double-B chunk.

The senior triple-A and double-A notes are collateralized by pfandbriefe issued by Rheinhyp with the subordinated tranches collateralized by Rheinhyp's unsecured notes.

The synthetic structure avoids many of the problems associated with securitizing properties located in several countries, said Georges Ruchti, head of structured finance at Rheinhyp, but still allows the bank to free-up regulatory capital.

Rheinhyp is so pleased with the structure that it will use it as a major funding strategy in the future, securitizing up to (11 billion by 2002, Ruchti said.

There is little doubt that the structure will also prove attractive to other European banks, with Barclays already reporting interest from several potential originators

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