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CMBS thriving without STS

By Tom Brown
15 May 2019

European commercial mortgage-backed securities (CMBS) have enjoyed a revival of late, despite the battering they took during the crisis years. Although regulators excluded the asset class from the Simple, Transparent and Standardised (STS) framework, it has shown that a select band of specialist investors is enough to get by in post-crisis securitization markets.

Compared with the US market, European CMBS issuance barely registers. Issuance in the US has crept up to $100bn in recent years, half of the US CMBS peak in 2007, whereas Europe sees only a couple of billion a year at most.

Regulators still see the asset class as “burnt”, in the words of one CMBS specialist, following the pasting it received during the financial crisis. But that was over 10 years ago, and CMBS has changed.

First, CMBS was declared unusable as collateral by the European Central Bank, with regulators blaming its “complexity”. Second, it was ignored for the European Securities and Markets Authority's STS framework implemented on January 1.

But despite its reputation, a recovery in European CMBS has materialised, even if one deal this week for Blackstone did not go according to plan. And the resurgence is expected to continue, with syndicate desks noting that levels are matching those seen last year.

While there have been a handful of STS deals priced in the first half of 2019, there have already seen six CMBS deals announced.

2018 saw a renaissance in European CMBS issuance, a rebirth which will likely continue without the STS blessing as the market bifurcates along with investor preferences.

CMBS deals, while transparent, are hardly standardised, with each transaction comprising unique assets which often require a physical inspection for investors to gain comfort with the transaction.

Securitization in Europe may have had a bad name since 2008 — CMBS maybe most of all — but it looks like the asset class is finding its niche well enough and doesn’t need a hand from regulators.

By Tom Brown
15 May 2019