CMBS volumes tallied strong growth in 2004, but not to the levels industry sources had expected, which should translate into plenty of business for the 2005 calendar. "We should see a substantial increase in 2005 as most new originations did not come up as bonds yet. This should mean a strong first half for CMBS issuance," said one market source.
According to figures reported by Moody's Investors Service, European CMBS issuance totalled approximately 22 billion ($28 billion) in 2004, representing 25% annual growth compared to the 17.5 billion seen in 2003 and the 22.5 billion in 2002. The U.K. dominated, accounting for 64% of total issuance. Sweden and France followed with each country contributing 9% of the market and Germany and the Netherlands each made up 5% of the market. Issuance volume was dominated by borrower needs for efficient funding and the growing investor demand for this product. Market sources said there is potential for further tightening across the capital structure in 2005.
Eurohypo recently priced its latest public conduit deal in line with tightened guidance - re-setting benchmark spread levels. After a relatively short marketing period, the GBP600 million (US$1.1 billion) Opera Finance CMBS transaction saw its triple-A notes tighten to 20 basis points over Libor and the triple B notes price at 70 basis points over Libor - the tightest level in European CMBS since 1999. "We feel that the subordinated notes were as tight as the market will take, but expect the next few multi-property conduit deals to push triple-A spreads even tighter towards 15 basis points," reported analysts at Merrill Lynch.
Moody's also said it expects volumes to reach 30 billion driven largely by U.K. CMBS conduits that saw large-loan originations in 2004. The Royal Bank of Scotland began marketing its GBP250.5 million Epic (UNITE) offering - backed primarily by student housing - last week, the fourth transaction to be launched from the conduit program. Also on the radar is a new refinancing of British Land's Broadgate CMBS expected in the coming weeks.
Adding further depth to market transactions could also ease new investors into CMBS trading. The CMSA is currently working on a European version of its U.S. standard investor reporting package, a database designed to provide standard-reporting formats aimed at easing the transfer of information from the servicer to the cash manager and from the cash manager to the investor. "While we think that this will help the market grow in the long-term, we don't envision it to be responsible for any significant jump in numbers over the short-term," said one source at CMSA.
Nonetheless, the CMSA is confident that its new reporting package will attract a bigger share of investors that, in turn, will help tighten spreads and hopefully initiate more issuance in the long run. "We launched into it because of the several complaints we were receiving from investors on not getting ongoing information of the different deals out there or always getting the information in different formats that required analysts spend huge amounts of time on individual deals," said the source.
Over the next 30 days, CMSA-Europe said it would accept questions, comments, suggested changes and enhancements from all CMBS market participants. The deadline for submitting responses to the draft is Feb. 23, and the final release of the new reporting package will follow once comments have been reviewed. The source at CMSA said that at the moment the feedback has been limited but positive.
The reporting package would initially be used in U.K. transactions but the group aims to develop a reporting package that would be applied to other European CMBS transaction as well. "It's up to investors to make it happen - if they agree to pay more for bonds that provide this level of information, the competitive pressure should drive more issuers to provide it," said the source.
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