International CMBS rating activity in the fourth quarter of 2000 continued the robust pace established early in the year and was further boosted by Standard & Poor's acquisition of Canadian Bond Rating Service. All told, Standard & Poor's issued ratings during the past quarter on seven international CMBS transactions totaling $1.154 billion. Most of the activity came from Canada (three transactions totaling $477 million) and Japan (two transactions totaling $348 million), while Australia and Sweden each saw a transaction close.
2000 year in summary
For the international CMBS market, the year 2000 confirmed for all what insiders had known for some time: The product is not only here to stay, but it is growing at unprecedented rates. The past year's record of more than $12 billion in issuance is a 28% increase over the record-breaking 1999 year. Furthermore, the transactions brought to market in 2000 were of similar size, with little of the skewness that marked 1999. Continuing 1999's momentum, Europe and Japan once again saw a surge of issuance, but so too did Australia and Canada.
In Europe, one might point to the emergence of repeat issuers as the main story line of the year. Whether it was conduit lenders in the U.K., single borrowers returning to the capital markets again, or issuers of nonperforming loan securitizations in Italy, the European CMBS market is now witnessing growing numbers of issuers coming back to the public debt markets. Few indicators can more appropriately demonstrate the credibility that CMBS has now achieved among borrowers, issuers, and investors in Europe.
The undercurrent in issuance from Japan in 2000 and borrowers tapping the capital markets remained diverse. The first transactions involving pools of newly originated, performing loans, aggregated for the express purpose of securitization, were successfully sold. Transactions involving single-tenant buildings, whose tenants are financially challenged, made up a large portion of issuance during the year. And nonperforming loans were again securitized. What is consistent in the market is that investors continued to snap up the product in search of yield.
Finally, Canada began to deliver in 2000 on the promise shown by the emergence of conduit-style lenders as far back as 1997. The market for CMBS has been dominated to date by U.S.-based issuers, but in 2000 the Canadian-based issuers stepped into the game.
In all, the promise of 2000 held out by prognosticators early in the year was borne out fully in so many ways.
A peek at 2001 and beyond
It should come as no surprise that the pipeline for 2001 would indicate issuance continues its two-year trend of robust, if not spectacular, growth. As in 2000, out of the box, Europe will lead the way with as many as 15 transactions looking to close in the first quarter. While the figure is hard to imagine, most of the work for at least half that number was done in 2000, with issuers delaying their transactions until this year for various reasons. As a result, the prospect of 15 transactions in the first quarter from Europe alone is not implausible. For the remainder of the year, expect issuers from Italy to dominate the second quarter, as their window of opportunity to take advantage of certain tax incentives ends in April.
Also anticipate that the number of repeat issuers will continue to grow as several first-time issuers in 2000 return to the capital markets in 2001. And lastly, watch Germany as many of the larger institutions, as well as the smaller mortgage banks, get their internal systems in place to finally gear up for a securitization of their seasoned loan portfolios.
Similarly, the pipelines in Japan, Canada, and Australia are all full. Issuance in Japan will likely peak in the first quarter as many Japanese companies look to window-dress their balance sheets prior to their own fiscal year-end. But, when the dust settles from that frenzy of activity, expect a steady stream of more transactions as the continuing macroeconomic malaise plaguing Japan leads companies to the capital markets in search of liquidity.
In Canada and Australia, the gestation period for CMBS transactions, while shortening considerably over the past few years, remains relatively long and will continue to stifle issuance for the next 12 to 18 months. Nevertheless, many hurdles have now been overcome in these markets, not the least of which may be a lingering aversion to leverage, which will lead to greater issuance volume in 2001. Canadian-based conduit lenders will emerge as viable repeat issuers this year and will complement other Canadian institutions securitizing seasoned loan portfolios. Australia will continue to move forward, albeit cautiously, in the CMBS arena. Still, the current pipeline of preliminary engagements indicates 2001 will leverage off the successes of last year for continued strong growth.
Though the picture could not be clearer or brighter for international CMBS, barriers remain to be overcome and storm clouds can rise faster than an ocean squall. New markets and jurisdictions continue to limit some investors' allocations. Turbulent global markets challenge deal economics for many issuers. Borrowers' lack of understanding of the mechanics of the capital markets in property finance undermines the attractive features CMBS can offer many. But, perhaps the greatest obstacle to unimpeded growth of international CMBS may be simply the lack of human resources devoted to the business from all parties involved. Nevertheless, all these obstacles have been slowly, steadily whittled down over the past five years. It is an irreversible trend, and only a matter of time before they are all eliminated.
International CMBS reached 20% of all CMBS issued in 2000. Even if the U.S. market rebounds from a lackluster year in new-transaction volume, one can expect the international markets' share of total volume to continue to increase to between 25% and 30% of aggregate issuance in 2001. That the international CMBS market will continue to grow at this rate is no longer an intriguing possibility but rather an unrelenting reality. The truly interesting question for international CMBS issuance: When will it overtake the U.S.?
