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For the erstwhile market observer, when you compare CMBS 2.0 against the backdrop of the pre Global Financial Crisis (GFC) crop of deals, one resounding observation is that the latter had a significant number of so called “conduit” deals, where transactions featuring eight or more loans were in plentiful supply. This “heyday” of European CMBS can be exemplified by one primary issuance that took place in the final weeks before the onset of the GFC that was comprised of thirty two loans secured by commercial real estate (CRE) located in five jurisdictions. In sharp contrast, CMBS 2.0 has been largely confined to the securitisation by a handful of banks of large balance sheet loans.
With Starz Real Estate bringing Europe’s first ever CRE CLO to market, a groundbreaking transaction that featured the securitisation of nine loans secured by CRE located in a number of European jurisdictions, questions are rightfully being raised as to whether the European market will once again start to witness the emergence of more CMBS deals comprised of a large number of loans.
Since the GFC, it is understandable that the CMBS market has shied away for the old school conduit multi-loan deals, with arrangers favouring more simplified structures which have largely been achieved by confining deals to the securitisation of one to three large loans. Indeed, the use of these structures has proved invaluable in the rehabilitation of the product, as these transactions have allowed confidence in the CMBS market to return as well as enabled a number of arrangers to re-launch their CMBS platforms.
Although simplified CMBS structures have been en vogue, it is questionable whether this status quo is likely to subsist in the coming years. Given the limited availability of sizeable CRE loans that are suitable for a large loan securitisation, the inevitable next step for the European market is the structuring of securitisations that are capable of accommodating a greater number of smaller loans. Assuming that this does happen, this would have a profound impact on the European CRE securitisation market as it would not only hugely increase the universe of borrowers that could benefit from loans destined for a securitisation, but would also open up the floodgates for the level of primary issuance given the large number of loans that could be potentially originated with a structured exit in mind. As borrowers prepare themselves to face a sustained period of escalating interest rates, the opening up of securitisation to smaller CRE loans, and with it the opportunity of obtaining cheaper debt, will be a welcome development.
It is not just borrowers that will herald such a structural shift, but fixed income investors will also welcome such a development, especially if the securitisation of a greater volume of smaller loans will lead to an increased amount of primary issuance and a smoother flow of deals, which in turn will precipitate the deeper and stronger investor base required to absorb and competitively price such an increased volume of deals. Similarly investors that are already in this space would finally have the justification to put in place the internal resources and infrastructure required to invest in this asset class with any real volume.
Given the emergence of a European CRE CLO product which at its core involves the securitisation of pools of loans, there are already signs that the European market is poised for a structural shift towards CMBS 2.0 transactions featuring a larger number of smaller loans. This is a huge step forward for securitisation as a financing tool, as this development not only signifies that investors have appetite for the product but also that they are comfortable with the more complicated securitisation structures and analysis that are endemic in this type of structure. Building on the success of the CRE CLO and fuelled by the increasing levels of demand from borrowers seeking cheaper CRE debt, it is highly likely that the European market will witness a marked increase in the number of multi-loan deals along with a trend towards a larger number of loans being securitised in these structures.
Although at this juncture in the market it is hard to say whether the new vintage of deals will ever reach the dizzy heights of a thirty two loan transaction, what is apparent is that the renaissance of multi-loan CMBS deals is a natural evolutionary step that has been catalysed by the emergence of CRE CLOs in Europe. Given that in recent years it has been the debt funds that have stepped into the shoes of the banks in the CRE lending space, then not only will they be the true architects of CRE CLOs, but these funds will be the chief protagonists when it comes to multi-loan CMBS.