Issuer: ELoC 16
Size: £813 million
Type: 30-year bond
Lead manager: Morgan Stanley
The market-leading status of Morgan Stanley’s European Loan Origination Conduit (ELoC) product has enabled the bank to bring the BBC to the bond markets for the first time in the broadcaster’s history.
The BBC, whose on-balance-sheet borrowings from the UK government cannot exceed £200 million ($320 million) under the terms of its Royal Charter, needs the cash to redevelop its central London headquarters, Broadcasting House. After talking to another bank about borrowing bank debt for a PFI/PPP-style deal, the BBC heard Morgan Stanley’s pitch on April 1.
Morgan Stanley argued that the corporation could tap the bond markets for cheaper funding if a loan from the bank to finance a lease-and-leaseback transaction was repackaged and sold as bonds. These would be backed by 30 years’ BBC rental payments to the special purpose vehicle that has bought Broadcasting House.
Big, cheap borrowing The deal, eventually executed through ELoC 16, involved the BBC issuing a 30-year, £813 million bond fixed at just over 5%. That’s the largest ever single-asset, single-tenant securitization in Europe, carrying what some observers reckon is the lowest coupon ever in the long-dated commercial mortgage-backed securities market.
“We were really interested in whether investors in the long-dated sterling market would have an appetite for the BBC,” says Ellen Brunsberg, Morgan Stanley managing director and ELoC head. “It is a well-respected company but an institution that from a financial perspective investors had never looked into. Property-based securitizations aren’t unusual, but they’ve never seen anything like the BBC before.”
The licence fee that all television viewers in the UK are obliged to pay insulates the BBC from the ups and downs of advertising spending compared with commercial broadcasters. The great imponderable, of course, is whether the government will renew the BBC’s charter in 2006. If it does, the BBC remains an investor-friendly entity with high revenues and little debt. If it doesn’t, MBIA is guaranteeing the bonds, mitigating the threat of non-renewal. The BBC is now credit rated for the first time in its 81-year history.
Investor appetite for the deal was good, with all but two of the 60-odd investors that Morgan Stanley’s distribution team spoke to buying bonds, and the issue was eventually one-and-three-quarter times oversubscribed. The bonds priced on July 11, several points lower than comparable issues in heavily regulated sectors such as water utilities. The deal closed on July 17.
“There are many entities that have always turned to traditional bank lending and continue to do so,” says Brunsberg, “This transaction shows the financial and structural benefits that can be achieved by instead considering the capital markets.”
With such companies as the BBC and rail infrastructure provider Network Rail setting an example for other highly regulated or quasi-government entities to follow, that could be good news for Morgan Stanley, which still dominates the property loan securitization market in Europe. On a typical ELoC deal, Morgan Stanley might lend between £1 million and £800 million (as it did to the BBC), repackage the loans, put them into one bond, and tranche it out. Investors then buy different tranches depending on their risk appetite.
Although such houses as Lehman Brothers and Deutsche Bank also have a presence in European real-estate loan securitization, neither can match Morgan Stanley’s volumes. Overall, the bank has lent more than £6.5 billion on over 1,350 assets through ELoC since 1998. No wonder other real-estate banks have eyed ELoC enviously.
Morgan Stanley’s line is that more entrants to the market will help liquidity and keep investors well informed.
But the risk transfer opportunities that a programme like ELoC represents excite competitor banks as much as profitable deal flow.
“Not that many banks lend money and then securitize the loans,” said one insider. “Morgan Stanley transfers the risk and moves on.” WestLB, take note.
