Ireland's first-ever CMBS deal in January may not lead to a deluge of Irish CMBS, but it does signal this jurisdiction may be coming into its own as a securitization destination of choice.
Eurohypo arranged the 375 million ($448 million) seven-year loan for Real Estate Opportunities Limited, a property investment company with real estate assets of more than 850 million ($1.06 billion). The loan will be used to replace existing borrowings, thus driving down costs while also freeing up cash.
It's the first single large real estate loan to be securitized in Ireland. It is secured against 16 retail and office properties (15 in Dublin and one in Cork), including the Stillorgan Shopping Center and offices occupied by Bank of Ireland and KPMG. The deal will allow REO to pursue further expansion opportunities in the real estate markets in Ireland and elsewhere.
"Various banks have tried to create a structure that works. We were the first to actually get it off the ground," said Caroline Philips, managing director and head of securitization at Eurohypo.
The main issue for Ireland as a new jurisdiction for commercial real estate securitization was getting the rating agencies acquainted with the different tax and insolvency rules. For investors, the appeal of Irish CMBS assets was straightforward.
"The agencies have to be comfortable how the tax and insolvency regimes work in extreme case default scenarios," she said.
The REO structure is easily adaptable and Philips hopes other Irish issuers would consider securitization of their real estate portfolios.
"Ireland has a sophisticated, vibrant real estate market," Philips said. "These property companies have real estate assets not just in Ireland, but all over the world, so we hope it becomes a good source for future deals."
But Philips did not predict a flood of these deals getting done.
"Where securitization works, it works extremely well, but in many cases traditional bank finance will remain the preferred funding route," she said.
Bedell Group established a subsidiary that handles corporate services in Ireland, Bedell Trust Ireland, at the end of 2003. But it has only been during the past 12 months that demand for Irish vehicles has heated up.
"The deals that we see come through generally fall into two or three principal categories," said Shane Hollywood, a partner at Bedell Cristin (a Jersey law firm).
Demand is growing for ABCP conduit sponsors to locate SPVs in Ireland. The interest has largely come from European, specifically German, banks that have been pioneers in this sector of the market. They now see opportunities to use Irish SPVs for both the acquisition of ABS and the financing of clients' trade receivables.
"Interest is not just from existing conduits. We have a number of new conduits in the pipeline both for European and North American sponsors," Hollywood said. "And I think it shows that even though the conduit market has reached a stage of maturity, there is sufficient demand to attract new entrants."
Hollywood said BTI is also working with a European bank on setting up a structured investment vehicle. There are a fairly limited number of SIVs in Europe. According to Hollywood, the upcoming SIV is one of the first that will be dealt through the Irish market. Synthetic collateralized debt obligations are also increasingly being done in Ireland, though Hollywood said a fair number of cash CDOs and collateralized loan obligations continue to be done as well.
Ireland's appeal lies in its straightforward, flexible tax laws that offer favorable tax treatment to clients. Hollywood said North American issuers feel comfortable using the market.
"Over the years Dublin has become one of Jersey's principal competitors in this area," he said. "There remain compelling reasons for deals to go to both jurisdictions. What Ireland is able to offer that Jersey and others cannot is its extensive double tax network and its EU label."
Structured finance transactions can provide tax neutrality, exemptions from withholding tax for the issuer and returns that are free of Irish tax for foreign investors. Ireland has double taxation agreements in force with 44 countries.
Issuers might also find the appeal of tapping a European Union-wide investor base alluring. Hollywood said there are several investors bound by restrictions that require a minimum amount to be invested in EU transactions who would naturally be drawn to deals done out of Ireland.
"The Irish market used to be a significantly more expensive option compared with other jurisdictions, but with an increasing number of law firms and other service providers keen to get involved, fees have been driven down and the cost differential as against other jurisdictions has certainly narrowed," Hollywood said.
"When we first looked at setting up in Dublin, there were only three or four corporate services providers and these were principally institutional players. Now we are seeing an increasing number of independent providers establishing a presence and they are aggressively seeking market share. As a result, the market has definitely become more competitive."
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