Tesco’s successful launch of a £430m CMBS last week, the first public deal in the asset class since the early months of the credit crisis, raised hopes that the revival of securitisation markets might be closer than had been feared.
But a closer look reveals that Tesco’s deal does not mark the return of securitisation, or at least not as we knew it.
Tesco’s Property Finance 1 was a single tranche, fixed rate, 30 year bond, with a rating tied directly to Tesco — repayment of interest and principal will be made entirely from rental income guaranteed by Tesco. By contrast, a typical European CMBS in the boom years of securitisation was floating rate, tranched to triple-A, with an expected maturity of five or so years and a large balloon payment — the source of the present fears about refinancing risk in the CMBS market.
Tesco’s deal was marketed to corporate bond investors and bought mainly by buy and-hold pension funds and insurance companies. Old fashioned CMBS were bought by banks and especially by conduits and structured investment vehicles.
Despite these differences, Tesco’s deal is likely to be the closest thing to a public CMBS in Europe for some time.
Secondary market spreads for CMBS are over 900bp and in many cases in the mid 1000s. With no recourse to the borrower and the outlook for commercial property grim, few investors would be willing to accept high loan to value ratios in a conventional CMBS, making the resurgent covered bond market a much more practical option for originators looking for funding, where it is available.
Making sense
But for companies with property portfolios or other stable, revenue-generating assets, using securitisation techniques can make a lot of sense. The Tesco CMBS was part of a £5bn property disposal programme that has allowed the firm to free up capital through sale and leasebacks to joint ventures.
Until the global economy rights itself and the securitisation industry puts its house in order, deals like this may well provide the only action — not counting retained repo transactions, restructurings and private placements.
Many companies have in recent years applied securitisation techniques to increase either the amount of finance they can raise or the rating of that debt — property companies such as Land Securities and British Land are the most directly comparable examples, though much more complex, but many non-property firms also took the same route.
The method was pioneered by UK water companies in the early days of European securitisation, and was applied to an ever broader range of assets and operating companies as investors became more comfortable with the technique.
That comfort level is of course considerably diminished — especially with the sort of investors now accepting yields that borrowers might want to pay. Companies looking to gain some of the benefits of securitisation are likely to follow Tesco’s lead and simplify structures as much as possible: reducing counterparty risk, making collateral analysis straightforward and sometimes providing a degree of recourse.
There will be a continuum between secured high yield bonds and securitisation — the only real difference being the covenant package.