Cadwalader, Wickersham & Taft putting the finishing touches on a new CMBS warehousing facility for CMBS and commercial property loans throughout Europe - the first of its kind in Europe. The financing for a £1 billion ($1.8 billion) fund is expected to kick off a major new trend in Europe, said Cadwalader Special Counsel Conor Downy.
"We are expecting to act on a number of similar transactions which are in the pipeline for later this year," Downey said. "Traditionally in Europe, large banks have been the major provider of capital to non-banks for the purpose of real estate investments. These structures - which are relatively novel even in the U.S. - provide an important alternative."
The structure is proprietary and sufficiently novel as to make the client and borrower easily identifiable. Downy explained that structures to finance these assets have to address a number of difficult issues - the most complex being the highly diverse nature of European CMBS and commercial property lending. Many European CMBS issues and commercial property loans involve issuers, borrowers, properties and legal documents across multi-jurisdictions, the loans and securities themselves also use a variety of structures to address local law and tax concerns.
"Any funding line for such assets has to adopt a reliable but cost-efficient means of taking security over these assets," added Downy. Further asset level eligibility criteria and representations and warranties have to be developed which address all of the potential concerns a lender may have as to such assets. And financial and performance tests have to be created to measure the value of and cashflows deriving from such assets in ways which take account of the structures of the assets and the ownership interest therein of the borrower.
"In the U.S., financings for CMBS and commercial property loans usually take the form of repos," said Downy. "However, establishing cross border repo-like structures in Europe is problematic for a variety of local legal and tax reasons. This structure functions similarly in commercial terms to a repo facility and will allow for financings to take place across legal systems. Cross-border financings of large numbers of different complex assets can prove expensive and any creative solution that will cut costs considerably is of interest to both lenders and borrowers in the market."
Downy added that these warehousing facilities are being structured to accommodate refinancing through CDO issuances. CDOs of CMBS and commercial property loans are not uncommon in Europe, as seen in the Europa series of deals, but they are not yet as common as in the U.S. where they are used for a variety of reasons including refinancing investments. "As the range of investors for CMBS and commercial property loans expands through structures such as this facility and as investors acquire significant portfolios, we expect to see much more use of CDOs to refinance such assets," summed Downy.
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