Rather like the Hans Christian Anderson story about the little match girl, the news that BAML has successfully launched two CMBS deals in quick succession has flickered light into an otherwise cold and beleaguered primary issuance market. Not only do these transactions provide a clear indicator that there is still life in the market, but this news is the most positive development for the industry since the summer of 2015, when adverse macro-economic factors precipitated by concerns over Grexit and the Chinese financial crisis shut down primary CMBS issuance.
In fact, the successful launch of these deals could not have come at a more opportune moment given that the future of European CMBS currently hangs in the balance following the European legislature’s decree that CMBS will not qualify as a simple, transparent and standardised securitisation under the Securitisation Regulation. More simply put, the European regulators have legislated against the product by adopting a position whereby CMBS will not be afforded the same regulatory capital treatment that will benefit other equivalent securitisation products.
Although clearly not a welcome position, the European legislature can nonetheless probably be forgiven for being wary, given the myriad of issues that were prevalent in CMBS 1.0. These issues have now been addressed and therefore should no longer be problematic for the new crop of deals. Unfortunately though, by taking the stance that it has under the new Securitisation Regulation, the European legislature has purposefully chosen to ignore the hugely beneficial role that CMBS can play in the European markets by:
- providing an important source of finance for commercial real estate;
- providing an efficient mechanism to transfer loan risk from the banking sector to institutional investors;
- providing institutional investors with a more liquid alternative to the loan syndication market; and
- bringing about much needed openness and transparency to the commercial real estate lending market.
Against this backdrop, the news that BAML have successfully launched Taurus 2017-2 UK and Taurus 2017-1 IT is therefore likely to provide a much needed boost to the industry. Not only do these issuances demonstrate that despite the regulatory headwinds, CMBS can still be done, but also that there is clear appetite for this type of fixed income product. That said, one still cannot help but draw parallels with the Hans Christian Anderson story about the little match girl and more specifically whether these CMBS deals could be said to be the final flickers of light for the product before its untimely demise. Whether this is ultimately true, rests in the hands of the European legislature given they hold the key to its fate however one thing that is certain is that the Securitisation Regulation in its current form does not create a glowing prospect for the future of European CMBS.