The European CMBS sector has seen less growth than anticipated so far this year, but that doesn't mean there's been a lack of action. Deals like the British Broadcasting House (BBC) transaction may well signal a real pickup for the second half of this year.

"Reports that this sector could see volumes challenged by waning appetite is probably just a case of overzealous predictions made last year," said one source. "Maybe it's just a case of scaling down anticipated growth."

As the market moves into the second half, analysts have backtracked on earlier growth expectations for the European sector, attributing the dip to a growing malaise in property fundamentals. Accord- ing to Dresdner Klein- wort Wasserstein, while overall European issuance volumes exceeded expectations, CMBS saw less than expected volumes. "CMBS have been very difficult to place this year as headlines of rising vacancies in countries such as the U.K. and Germany have kept investors away," reported the bank.

Recent data from Commerz- bank echoes the sentiment. According to the bank's figures, CMBS issuance reached E4.6 billion (US$5.2 billion), compared with the E6.2 billion (US$7 billion) recorded this time last year. "When looking at a whole business or sale-and lease-back CMBS transaction, the assessment of the credit quality of the single obligor (aside from structural and other features) remains key," said analysts at Dresdner, adding that in the current environment investors expected a higher premium to compensate for the risk.

But it's no dead calm...

Nonetheless, the market is moving along. Two deals - including the monumental BBC transaction - have launched under Morgan Stanley's ELoC program and First Real Estate, an Italian CMBS deal priced last month.

The BBC transaction priced its GBP813.2 million (US$1.28 billion) single tenant securitization in July (see ASR 8/21). The deal demonstrated the innovative expansion of the CMBS structure in Europe to fit the financing need of a particular project. The fact that it made its way to completion is encouraging, and moves along other developments in the CMBS structure, market sources said.

The deal is issued via special purpose vehicle Juntura Plc, and the proceeds will pay for the six-year redevelopment of the BBC headquarters. The transaction features a monoline wrap that addresses the risk that BBC could lose its charter in 2006, when it is due for renewal. The policy pleased both sides: it lowered the overall cost of funds for BBC, and it made the transaction more in tune with investor demand.

According to sources on the deal, there was talk of the structure being offered without a guarantee, below the triple-A level, though the dealers decided it would be a difficult sell.

"The transaction was favorably received by the bondholders, but it was in many respects a very particular transaction, and we don't expect to see too many other deals follow suit," said one source. The BBC, which is neither a completely private nor government-1owned entity, brought in elements of private- public partnerships (PPP). "The BBC was a particular high-profile tenant, and we don't anticipate that there are many issuers of that nature. It's also important to note that the political climate for PPP is colder than it has been in the past."

While the deal won't likely be replicated, elements of the structure will likely be used in new transactions down the line. More banks and financial institutions have already begun looking at the market, sources said.

"Securitization will increasingly become a favorable alternative to traditional bank debt for portfolios of assets with long-term values and good property fundamentals, especially in conventional property sectors," reported analysts at Fitch Ratings. "A good indication of the future potential of this sector is the proportion of owner-occupied corporate real estate in Europe, which is much higher than in the U.S."

Nonetheless, the visible slowdown in issuance is evidence that CMBS is not the best answer for everyone. For example, the London branch of Euyrohypo AG earlier this year was marketing a GBP488 million (US$787 million) transaction it reportedly expected to price by the end of June. It has since been pulled off the screens due to investor reluctance to accept the offered levels, though it's expected to reengage marketing before year-end, sources added. The deal would be launched through Opera Finance SPV. Original guidance for the deal saw price talk at 50 basis points over the three-month Libor for the triple-A piece, 80 basis points for the double-A piece and 230 basis points for triple-B piece.

Price guidance was also issued last week for the GBP394.2 million (US$635.4 million) Iolaus, which is also issued under EloC. The class A saw price talk at 52 basis points over Libor and the class B notes are being talked in the 55 basis point area. The transaction is backed by 11 loans on 48 commercial properties - 70.7% from the office sector; 10.2% retail sector; 9.8%, warehouse sector and 5.8%, self-storage sector.

And a second Italian CMBS issue was added onto the pipeline last week. The E441.5 million (US$498.2 million) Bramante deal is backed by a single loan issued to Telemaco Immobil- are by Banca Intesa. The capital structure will include five tranches ranging from triple-A to double-B all issued under a super senior tranche.

"Although ideally we would prefer to see more diversity, from a credit perspective, triple-A and double-A rated paper represent minimal credit risk," said one source at Morgan Stanley. "At the triple-B levels there needs to be a lot more digging into real estate fundamentals - the sector offers value if you think the sector will recover or at least not weaken substantially further."

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