At the beginning of 2007, expectations for CMBS issuance in Europe stood at between 75 billion and 100 billion for the year. The asset class was one of the fastest growing in the region and by the time issuance stalled at mid-year 40 billion of CMBS had been done. But that leaves between 35 billion and 60 billion of planned issuance for the rest of the year hanging in limbo. There were between 20 and 30 deals sitting with the agencies when the crisis hit deals that presumably have not made much progress since then.
This is a particular problem for European real estate securitization banks because of the time that deals spend in incubation. The time period between origination and securitization can be as little as eight weeks in the US whereas in Europe it is more like six months. Banks in the US are therefore unlikely to have been caught with the kind of inventory levels that European banks have and many had reduced their exposure in February and March last year when real estate jitters in the US first started to bite.
Ronan Fox, managing director at Standard & Poors, says that 40 billion of European issuance was slated for the last third of 2007 but reckons that 15% of this would have been secured loan or match funded deals where if the deal is scrapped no loan is written. He therefore concludes that about 34 billion of loans that were destined for European CMBS are stuck. "Of this 34 billion, I would expect that around 14 billion will be syndicated, which leaves a 20 billion CMBS overhang," he says.When the credit crunch hit in September the expectation was that banks would sit it out in the belief that the market would return (see CMBS: Back to the future Euromoney, October 2007). But the fate of several deals that have been attempted recently does not augur well. "Good elements of progress were made until mid-November when things got a lot tougher," says Fox. Morgan Stanley attempted but subsequently postponed its 695 million ELOC 29 trade at the end of November and two deals from Deutsche Banks DECO conduit DECO 16 and 17 have hit delays.
DECO 16, which was rated at the end of June, involved a Class A tranche of £431 million ($878.8 million) notes backed by four real estate loans totalling £829.3 million. By the end of July the size of the Class A tranche had been slashed to £295 million and it was backed by just two loans. By mid-October Moodys withdrew its provisional rating of the deal and sources close to the situation reckon that the collateral is now likely to go to the syndicated loan market. The two loans backing the deal were backed by UK collateral the largest secured on bingo hall and casino properties operated by Gala Coral and the second backed by pubs.
Collateral such as this can be a tough sell even in a good market these are leisure assets, which are notoriously hard to value, and the gaming industry itself has been hit hard by the UK smoking ban and recent tax increases for regional casinos and changes to regulations covering gambling slot machines. Trying to get a deal away in this market backed by such loans was always going to be a tough job.A second DECO deal, DECO 17, was still being attempted as Euromoney went to press. This 1.25 billion deal is backed by European loans, mostly from Germany.
In the first half of this year the European CMBS market was clearing 6 billion a month. The fact that it is having so much difficulty now clearing 20 billion at all shows how serious the problems facing the sector are. Fox at S&P remains confident that the market will return at some stage over the next year, emphasizing that it serves a "genuine economic purpose". Hans Vrensen, head of European securitization research at Barclays Capital, is also reasonably optimistic. "People havent just been sitting around since July," he says. "Banks are releasing pressure by proactively going to the syndicated loan market. Much of the paper that has been issued has been retained but some of these deals have in fact been partially sold. As a result the balloon of inventory building on bank balance sheets has already been partly deflated."
However, others are not so sure. "I dont see any significant movement in this inventory," says James Martin, vice-president at Merrill Lynch. "It is a question of whether investors can be found to take up the slack left by the ABCP conduits and SIVs. If that does not happen there is a risk that spreads will go wider if banks start to dump paper." But Fox at S&P maintains that it is unlikely that the banks will conduct a firesale of these loans. "If these loans cannot be securitized then the preference for the banks would be to hold on to them as the credit quality is good," he says.
The extent to which the market can get moving again is very much dependent on how sharply sentiment in the real estate market itself deteriorates. The CBRE commercial property index showed a total return of negative 3.7% for the month of November. Martin at Merrill Lynch points out that if rental payments, which account for, say 5%, are taken out, this means a fall of over 8% in a month an indication of how sharply sentiment in European real estate has turned.