Bayerische Landesbank plans to securitize between EUR1-2 billion (USD850 million-USD1.7 billion) of its commercial mortgage portfolio using derivatives and is currently looking for an investment bank to lead manage and structure the deal. Klaus Distler, first v.p. and head of securitization in Munich, said Bayerische is preparing this deal to reduce regulatory capital and remove assets from its balance sheet. It has opted for a synthetic transaction because it is cheaper and quicker than a cash deal.
And bankers are excited about getting a slice of the action. Several CDO originators told DW they would expect to bid for the business. Paul Lewitt, head of credit derivatives at Westdeutsche Landesbank in London, predicted lots of banks will chase after the deal. Lewitt was unaware of Bayerische's plans, but noted that this type of deal is more time consuming than residential mortgage CDOs because the reference portfolios are harder to model and do not contain as many loans.
The make up of the portfolio has not been finalized but Bayerische's Distler said he wants to maximize the regulatory capital relief the bank receives. He estimated 90% of the portfolio will consist of mortgages to foreign institutions or mortgages which have a loan-to-value ratio of below 60%. This is because the German regulator gives 50% regulatory relief to German-based institutions on commercial mortgages with a loan-to-value ratio above 60%.
Distler said the landesbank has the technology to structure the transaction. The bank structured a EUR250 million synthetic securitization of its residential mortgage portfolio last year with an investment bank, which he declined to name. It wants to work with an investment bank to speed up the procedure and help distribute the deal and will chose counterparties based on their experience in the CDO market and their distribution channels. He added overall price was also an important consideration. Distler hopes to select an investment bank in the next couple of weeks and have the deal finished before year-end.
Distler envisages the CDO will be a public offering with a credit default swap as the super senior tranche and credit linked notes making up the remainder.