News Analysis
Shifting dynamics spur CMBS prepays
The €1bn Woba loan was successfully prepaid in full this week, confirming growing speculation that the Taurus 2013-GMF1 CMBS' days were numbered. Far from being an isolated incident, the move illustrates how broken the relationship between CMBS and other debt capital markets has become.
The Woba loan formed the collateral of the TAURS 2013-GMF1 German multifamily CMBS transaction. Bank of America Merrill Lynch European securitisation analysts raised the prospect back in December of Vonovia choosing to prepay the CMBS.
Vonovia chose to fully prepay GRF 2013-2 two years ahead of its November 2018 expected maturity date, accepting a €9.5m prepayment fee in the process, and raised €1bn by issuing an eight-year bond at the same time. This month, the TAURS 2013-GMF1 CMBS was subject to a prepayment fee of 1.5%, equating to a repayment price on the notes of 100.27% of par, plus accrued interest.
"The decision to prepay the Woba loan and the TAURS 2013-GMF1 transaction really underlines how disconnected from other debt capital markets CMBS has now become. We have reached the remarkable situation where it is cheaper to refinance in the corporate bond market than in the securitisation market," says Conor Downey, partner, Paul Hastings.
He continues: "The nature of securitisation should result in CMBS having a higher credit quality than corporate bonds, but there is a lot of uncertainty in the market - not least because of regulatory developments, but also because of a comparative lack of investors. When CMBS transactions such as TAURS 2013-GMF1 were issued four or five years ago, the CMBS spreads were relatively high."
With market dynamics as they are, prepaying could make sense for many other CMBS loans, although a number of factors will come into play. However, Downey notes that while certain loans might appear to be candidates to prepay, it is unclear whether the borrowers could obtain the same leverage in the current market.
"The likes of Deutsche Annington and Woba kept faith with securitisation as a way to diversify funding strategies, but the decision to prepay is a demonstration of just how disrupted the market has become. CMBS is clearly not a sufficiently competitive option in the current market," says Downey.
He continues: "STS is supposed to change this and to revive the European securitisation market. However, STS may be dead in the water before it even gets started."
To understand why, it helps to look at the RMBS market. The convention there has become to have step-ups in coupon after three years, which has brought the expected life of deals down now to under three years.
Whereas costs would previously amortise over a decade or so, the shortened lifespan makes STS compliance costs suddenly quite critical. These STS compliance costs are likely to be significant, so these deals may find they are unable to comply with STS even if they want to.
This is all for a market intended to benefit from STS. In the meantime, CMBS appears to be falling out of favour in Europe, as bond issuance becomes the preferred option.
"Deutsche Annington has chosen to go to the high yield bond market rather than reissue CMBS, while Land Securities also recently redeemed long-dated bonds out of their structure [SCI 2 February]. There are clearly dislocations between different parts of the capital markets to be taken advantage of, but CMBS is not being chosen as the tool to do that," says Downey.
He concludes: "These multifamily deals really constituted the bulk of post-credit crunch CMBS issuance, but with the likes of Chiswick Park and Merry Hill, along now with Woba, we are seeing the largest CMBS being redeemed and withdrawn from the CMBS market."
17/02/2017 16:32:13
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