A new £420 million CMBS deal is being marketed at the moment, according to Barclays Capital. This deal ends a two-year lull in the Euro CMBS primary pipeline.
The deal, Tesco Property Finance 1 plc, consists of a single, fixed-rate, sinlge-A-rated tranche and is backed by two loans secured by 12 supermarkets and two distribution properties let on long-term leases. The leases' upward rent review are to Tesco plc subsidiaries, but are guaranteed by Tesco plc.
Tesco has some flexibility to sell properties and add new properties to the pool.
The rents are raised annually. However, since the rents are insufficient at day one, there is a total return swap with Tesco to meet the debt service requirements at day one. The CMBS bonds are fully credit-linked to the Tesco plc corporate rating, which is currently at A-'.
We would expect the pricing to confirm the discrepancy between the fixed rate and floating rate CMBS markets, with the former providing more attractive funding for issuers, Barclays analysts said. Regardless of the misalignment of fixed and floating-rate markets, we would see a successful placing of these bonds as a positive sign for the long-term viability of the European CMBS sector.
