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BANKING

CMBS: Tight to prime

by John Davy, senior ABS analyst, Fidelity International.

Better rental, but lower capital growth

Refinance risk

With corporate defaults still low, our main concern in the UK is the zero nominal yield gap that is having an impact on leveraged buyer returns (ie, conduit CMBS sponsors). We feel that aggressive whole-loan leverage in many deals, coupled with a rising interest rate environment, may cause refinancing issues for certain transactions. Conduit asset quality is also mixed. The concern here is that secondary yields are trading at historical tights to prime. As a consequence of the above our investment strategy for UK CMBS is to selectively buy reversionary deals with prime assets let to strong tenants on long leases. Admittedly these transactions can be hard to source and are plagued by taps. Given the greater yield spread in continental Europe the cycle has further to run relative to the UK. We are encouraged by the increasing pipeline of CMBS deals from new jurisdictions. These transactions allow our funds to diversify somewhat away from UK risk.

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