The publishers behind the Denver Post and the Rocky Mountain News locked up a credit tenant lease-backed offering in the private placement market last week. The $81 million deal added some needed diversity to a market competing against CMBS for issuers. However, findings from a recent survey show a decline in CTL investments by buysiders who stem, primarily, from the insurance industry.
The CTL for the Denver Newspaper Agency circled up just as July closed. Agented by Wachovia Securities, the $81 million deal priced as a 23-year final/18-year average life maturity at 210 basis points over Treasurys, market sources said.
Stemming from the publishing sector, the issuer added some depth to a market seemingly dominated by retail this year. For example, both Walgreens and Wal-Mart issued CTLs in the first half of 2006. Walgreens issued two CTLs, according to market sources, raising $4.4 million in February via agent Bostonia and again in June via KeyBank in a $3 million CTL. Wal-Mart utilized agent Bostonia for its $6 million CTL in April.
Fortunately, some of the largest CTLs this year haven't stemmed from the retail sector. Duke University and Yuba County California turned to the CTL market in 2006, raising $11 million and $32.6 million, respectively, according to data from ASR sister publication Private Placement Letter (PPL). William Blair agented the Duke University deal while KeyBank underwrote the Yuba County CTL.
However, while diversity of sectors seems to be increasing, it hasn't been easy to land that deal flow.
"CMBS and other conduit type transactions have eaten away at the CTL market to a point," said KeyBank's Vice President Nicholas Muzychak, who is responsible for origination and execution of real estate-related products. "But not in every market that CTLs cater to."
CTLs deals are getting done - they're just not going to the private placement market as much as they used to.
"Yes, deal flow is down significantly in the private market, but that doesn't mean there isn't a lot of net lease activity," agreed Kyle Gore, managing director, real estate finance in the net lease group at RBS Greenwich Capital. "A number of them are finding their way into CDOs and CMBS conduits which was not the case in the past."
Today it's common practice to bundle a CTL note issuance with other forms of collateral and package them into one CMBS deal. This strategy has proved especially appealing to the CDO market, which harnesses these deals as collateral for its own purposes. And it doesn't hurt that most CTLs are investment grade, helping to raise the ratings profile of the overall package, intensifying the interest from the CDO market.
Still, plain vanilla CTL business has not exactly seized up.
Muzychak, who was moved over to restart KeyBank's CTL business in May 2005, said the firm has had 14 such CTLs either close or are under commitment over the last 15 months. Nine of those have been executed in 2006 to date, he said. "It has been a stronger year for us in terms of deal flow. And I think the market is seeing a bit more deal flow overall, this year," Muzychak said.
Nonetheless, PPL's Annual Buyside Survey shows investments in this instrument have slipped. The survey found that in 2005, eight private buyside shops reported $565.5 million in total CTL investments that year. On average, each buyside shop invested about $70 million. However, this is down from the year prior. In 2004 this same audience invested $1.3 billion in CTLs, with an average investment size of about $124 million.
The one conundrum facing the CTL market isn't investor appetite, market pundits insist. Investors, stemming from the life insurance industry, are drawn to the CTL product for its long durations; it's common to see CTL maturities of 15 to 30 years out. But that's changing, as many CTLs aren't going out as long thus helping to move deal flow over to CMBS conduits.
"For tax purposes, from an issuers' perspective, there are reasons to do 10-year structures with longer amortization schedules," Gore said. "These find their way into CMBS, as opposed to what would find its way to the private market - a fully amortizing structure or one amortizing down to an insured balloon structure. It's certainly not investor appetite."
To be sure, private placement buysiders seem to echo the sentiment that recent declines from the PPL survey are due to deal flow - there's simply less of it.
"We would be happy to have more CTLs to respond to," said Stuart Shepetin, managing director, private placements at TIAA-CREF. "We certainly have the resources to do so."
While TIAA-CREF was unable to participate in the PPL annual Buyside Survey, Shepetin said the firm's total private placement portfolio was about $16 billion. He noted the firm actively looks at CTLs, and has a total investment portfolio of $2.3 billion in the product.
"You can earn incrementally yield on the investment, with appropriate analysis of the structure and the lease of course," Shepetin said of the market's attractiveness to private buysiders.
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