Information Management Network recently hosted its third European CMBS conference in London. With 600 delegates in attendance, the gathering served as a testament to the growth of the European CMBS sector.
Most telling of how the market has matured has been the sector's pricing resiliency despite the ongoing U.S. subprime turmoil. "The bid remains strong," noted Ganesh Rajendra, managing director and head of securitization research at Deutsche Bank and moderator of the opening panel. "The structure shows strong spreads, and it is amazing to see this in light of the current market situation."
CMBS pricing resiliency has been driven by fundamental asset growth, which, in turn, has been boosted by equity and real money demand. Panelists said that the property market is still in a positive credit cycle and investors have little reason to sell - even psychological contagion risks would only have a short-lived impact.
Damien Thompson, head of leverage finance and property securitization at the Royal Bank of Scotland and a speaker at the panel, said that only a handful of structures had any real exposure to home-equity loans. "If we are looking at fundamentals, the market here is still strong, but we could see some contagion if we see a sharp recession in the U.S."
Cost of funding
The sector has also seen very attractive funding costs in the primary market. Panelists said that more borrowers have been prepared to go to market on primary issues as opposed to conduits. "There are a number of banks going to securitize real estate risk - it's a trend that has spilled over from last year," said Caroline Philips, managing director and head of securitization at Eurohypo AG and a speaker at the panel. "From a commercial banking perspective, we are seeing more banks willing to want to churn assets by using the securitization market - for us it's a very important part of our business."
Giovani Pini, credit analyst at European Credit Management, while speaking on the opening panel, said that the search for yield has pushed many investors to look at CMBS. "European CMBS can offer more yield and increased transparency," he said. "The biggest change we've seen from the market is a change in structure to accommodate higher prepayments."
Panelists said that they are beginning to see a slowdown in U.K.-based deals, and originators are starting to turn their attention to many other jurisdictions. Chris Walsh, a partner at Clifford Chance who was also part of the panel, said there has been a huge growth in multijurisdictional deals that three years ago would have been considered highly complex but are now being pushed out in just roughly three months. But there still remains the barrier of high execution costs and the key to the success of these transactions is the modification of structures to offer issuers ease in deal execution. "The more we standardize the better," Walsh said. "It's starting to happen. Originators are starting to realize which jurisdictions work better together."
The CMBS market will begin to see more medium-term notes styled programs to improve efficiency as it has in the RMBS sector, Walsh added.
On the conduit side, RBS's Thompson said that there is little room for innovation, and barriers still exist. "The biggest potential move will be toward more managed deals with higher levels of substitution," he said. "The commercial real estate CDO market is a managed product and is gaining acceptance. The question is: Can we gain that sort of acceptance with substitution provisions?"
European Credit's Pini replied that, at the moment, he still prefers to see little substitution in deals while Eurohypo's Philips said that movement in pricing levels happen in markets where substitution occurs more frequently. "These deals would price wider than regular CMBS," she said. "It's the price you pay for having that manager flexibility."
Panelists said they expect steady volume growth this year. One swing factor could be the mergers and acquisition and private equity activity saturating the property market these days. "There are few companies in Europe that are out of the reach of private equity today," Thompson said. "If we see exceptional growth, it will be a result of this."
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