Commerzbank kicked off the season for small and medium enterprises (SMEs) loan CDOs with its CB Mezzcap deal, which priced at the beginning of April. It was closely followed a week later by a transaction from HSBC Trinkhaus & Burkhart. On the heels of these two transactions, market sources say there are several more CDOs of this type expected to come to market later this year.
The deals referenced subordinated profit participation agreements with German SMEs and functioned as conduit-like origination platforms where securitization is integral to the business model, explained analysts at Deutsche Bank. Both Deutsche Bank, via its IKB equiNotes joint venture, and HVB, through its PREPS program, have both employed a similar structure in the past.
HSBC's Heat Mezzanine SA Comp 2 was well received by the market. The Class A1 notes priced at the tight end of price talk while Class B1 priced two basis points inside. The EURO218.4 million ($269.6 million) triple-A and the EURO30.8 million single-A rated notes offered priced at 33 basis points over Euribor and 83 basis points, respectively.
Meanwhile, CB MezzCap, which marks Commerzbank's debut in this sector, saw similar success. The transaction was oversubscribed throughout the capital structure within 24 hours after the books opened, said a source close to the deal. Commerzbank Beteiligungsgesellschaft (CBG), a subsidiary of Commerzbank, acted as financial advisor to the issuer and was primarily responsible for the selection of the portfolio companies.
CB MezzCAP L.P. includes 35 participation rights (Genussrechte) issued by German SME clients of Commerzbank with a turnover of between EURO20 million and EURO600 million. "These mezzanine capital notes are issued by a client of ours so a fundamental difference between our structure and past structures [to come to market] is that we've used our own client base to get these assets originated," explained Nicolaus Trautwein, co-head of Commerzbank's German based securitization team.
On the structural side, the transaction trapped excess spread; a feature that was not present in past mezzanine CDOs, Trautwein said. All assets of CB MezzCAP L.P. are based on a standardized documentation and were generated for CB MezzCAP.
To improve the companies' balance sheet ratios and credit standing, the assets were structured to achieve full equity treatment under German GAAP. Trautwein said that it's only the second time a mezzanine structure achieved this treatment by German regulators. And unlike past deals, Commerzbank also placed double-B and triple-B notes.
The pattern of generating assets tailored for securitization programs will be reused for succeeding transactions, said Trautwein. Down the line, he expects that Commerz-bank would be originating a second deal from its MezzCapp platform later this year.
Trautwein expects a busy year ahead for mezzanine capital deals.At least three other players expected to come to market, including West LB, HSH Nordbank, and Deutsche Bank, which will issue from its IKB platform.
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