Any potential issuer looking for evidence of how the hybrid CMBS/whole-business market is changing need look no further than UK holiday park operator Center Parcs’ recently launched deal. This is understood to be the third time that the company has looked at a securitization – and it looks like being third time lucky. It was originally considered as early as 2000 and revisited just before Center Parcs was acquired by Blackstone Group last year. The deal that has finally emerged is a £750 million ($1.49 billion) issue arranged by Merrill Lynch with a remarkably short duration of just over four years. This takes the traditional concept of whole-business securitization to a new level: it is a leveraged finance deal for a private equity buyer looking for an exit.
The deal – CPUK Mortgage Finance – securitizes a single loan originated by Merrill, Citi and RBS, which is backed by four holiday parks. There is a £282 million B note underneath the securitization. The £260 million A1 tranche has been rated triple A by Moody’s, Standard & Poor’s and DBRS but the £190 million A2 tranche – also triple-A – is only rated by S&P and newcomer DBRS. DBRS is known to be keen to build up its CMBS franchise in Europe.
The risks of lending to a single operator in the leisure market are not to be sniffed at. Such a short tenor is rare in this market and has been driven by the desire of Blackstone to align the capital structure to its exit. This clearly presents refinancing risks but there is a seven-year tail and a long-dated swap to tie in financing costs. But it is essentially the securitization of a leveraged finance structure. "I don’t think that performance risk is the issue, it is who will be the buyer that is the issue," says Adele Archer, senior vice-president at DBRS.
Observers say it is the interest cover ratio [1.72 times] and duration that get this deal to triple-A. Joe Pedlow, who worked on the deal at Merrill, concedes that the very short tenor certainly helped to get more of the deal so far. But he emphasizes the stability and predictability of the cashflows: the four parks themselves have historically high occupancy rates of between 92.4% and 94.1% over the past three years. "These assets have the most amazing history of performance," he says. Blackstone has done similarly short-dated deals for US hotel assets.
Because of the likelihood that Blackstone will sell in the near term, performance risk ranks alongside additional risks associated with who the eventual buyer might be and what they will be prepared to pay. Leisure assets are notoriously tricky to value – as several deals have found to their cost. Fitch looked at the deal but did not rate it and Moodys only rated the A1 class. S&P and DBRS both rated the notes down to triple-B; the DBRS analysts that were on the deal were both ex-S&P and it is therefore not surprising that the two agencies took a similar view.