North America MBS Issue: Gramercy Property Trust's US$3bn CMBS

Air Lease changed the arcane world of aircraft finance with a new structure that raises the bar for transparency, efficiency and liquidity. Air Lease was able to raise US$544.87m in July through the sale of Thunderbolt II (TBOLT 2018-A), a new kind of aircraft securitisation that took weeks to price instead of months, opened up its financials to the public and turned illiquid equity notes into tradable securities. “We took the view, along with Air Lease, that you had to do more than just change the form,” said Carl Anderson, a managing director at Bank of America Merrill Lynch, who worked on the transaction. “You had to go a step further in terms of information to make this work.” For the first time, investors in Thunderbolt II – irrespective of whether they were buying debt or equity – were given the same level of information at exactly the same time during the marketing process. “Before in this market, you never had any clue how much equity was contributed, nor what the equity was getting as a return, and no idea what the manager was earning for their performance,” said Ryan McKenna, head of corporate strategy at Air Lease. “That seemed very wrong.” To forge a new path, McKenna spent months building a web-based financial model that would be updated regularly and report everything from engine maintenance reports to aircraft lease extensions. “I thought, if we provide this level of disclosure, all participants would know exactly where the money is flowing and how to track it.” McKenna said. The strategy has more than paid off. The deal’s biggest slug of Single A rated notes narrowed to be priced at 130bp over interpolated swaps from talk in the 135bp range. And its novel tradable “GAPS” equity notes narrowed to 17% from initial talk around 18%. The number of equity investors also rose from three in Thunderbolt I to 20 in Thunderbolt II. And in secondary trading, pricing on the tradable equity notes has narrowed to 16.3%, according to Bank of America Merrill Lynch data. Carla Schriver, a vice-president at Goldman Sachs, said that Thunderbolt II has changed the old ways of doing business in aircraft ABS, which previously had been more akin to negotiated M&A transactions with a handful of key investors rather than broadly syndicated securitisations. “Thunderbolt just fundamentally changed that,” Schriver said. Bank of America Merrill Lynch was global coordinator, and a joint structuring agent with Mizuho and Goldman Sachs. Citigroup, BNP Paribas and MUFG were also joint bookrunners. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

Citigroup led many of the year’s biggest commercial real estate financings for the sector’s largest property owners. It tapped the CMBS market and also used its own balance sheet to win deals when there was no shortage of competition for loans from other banks, thrifts, government-backed lenders and life insurance companies. There is no bigger name than Blackstone in commercial real estate and it was Citigroup that the property giant picked to lead the debt financing on its US$7.5bn leveraged buyout of Gramercy Property Trust, the largest structured US real estate deal since the global financial crisis. It was anchored by a US$5.5bn debt package that closed in October, of which US$3bn came from a CMBS loan. Collateral for the CMBS is made up of a large swath of industrial properties that dot the country, with Citigroup providing 60% of the funding and Bank of America Merrill Lynch the rest. That CMBS portion was split into US$2.5bn of bonds and US$500m of mezzanine loans. “Coming into this year, we did acknowledge there was going to be a lot less in terms of [refinancing] CMBS maturities,” said David Bouton, co-head of US CMBS and real estate finance at Citigroup. “We began talking with counterparties about M&A, big transactions, the single-asset/single-borrower business, and thought we had to really pursue that aggressively.” Another global real estate colossus, Brookfield, selected Citigroup to lead-manage a landmark transaction: this time the US$1.85bn refinancing of its sprawling Atlantis Resort in the Bahamas – and just ahead of the hurricane season. It isn’t every day that the CMBS market finances a Caribbean mini-city of four seaside hotels, several restaurants, a casino, a water park and a desalination plant. It even mortgaged dolphins. Pricing on the bonds, totalling US$1.2bn, widened some from initial talk, but they were still priced within expectations. Citigroup also sold another US$650m of mezzanine loans backing the property to three investors. But beyond the glitziest real estate transactions, Citigroup also kept originating a stream of conduit loans for benchmark CMBS deals. By mid-November, it had pooled loans into a dozen conduit deals with other top banks, and ranked third in the CMBS league table. Way back in January, one of Citigroup’s conduit deals hit the post-crisis low of swaps plus 66bp for 10-year Triple A paper. Later in the year, market volatility pushed spreads on similar bonds to around 90bp. But the rockier backdrop also highlighted one of Citigroup’s strengths – its long-standing presence in the CMBS space, which through its Salomon Brothers heritage can be traced back to the creation of the very first mortgage-backed deals in the 1970s. For many investors, buying into a series of conduit deals backstopped by Citigroup makes the bonds more attractive from a liquidity perspective. “As 2008 proved, the securitised markets’ Achilles’ heel is liquidity,” one portfolio manager said. “We prefer predictable conduit issuance and issuers with a lot of deals outstanding already, where multiple dealers are making consistent and predictable markets.” This year, private-label residential mortgage bond issuance had set a new annual post-crisis record of US$100bn by November. One of Citigroup’s more notable RMBS transactions was helping Australian mortgage lender Pepper Homes come to the deep well of the US dollar market with its expanded mortgage product. Citigroup was a joint lead on the US dollar portion of Pepper’s first dual-currency and cross-border transactions from its I-Prime shelf. The programme includes a higher portion of investor loans and loans with interest-only periods than Pepper’s standard prime transactions. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

“National service” is how Allen Appen, head of bond financing at Lloyds, describes the bank’s UK-focused structured finance business. “This group is all about supporting the real economy.” That real economy hadn’t seemed too desperate for support from securitisation in previous years. Even once the stigma of sub-prime receded, central bank liquidity schemes were providing many lenders with cheaper funding sources. But Lloyds had faith that the market would be needed again and had been preparing for the end of central bank support. “The securitisation market in Europe, however badly damaged it was, was not going to disappear,” said Appen. “Eventually, conditions would emerge that would enable full resurrection.” With the Bank of England’s term funding scheme ceasing to lend from February UK banks would need ABS investors once again, but there were doubts the fickle sterling market could absorb a supply spike on its own. In anticipation of this, Lloyds had started re-engaging US accounts in 2017, traditionally big buyers of UK paper but feeling neglected after UK supply in dollars dried up. Just US$400m of dollar-denominated UK RMBS was sold in 2017, but that ballooned to US$4.7bn in 2018, with five credit card deals adding a further US$1.8bn. “Our view was that 2018 would be about proving the market would be there for the big treasuries and the smaller players,” said Matthew Cooke, global head of the securitised products group at Lloyds. Rival syndicate officials acknowledge the groundwork Lloyds carried out with US accounts, and those investors’ ready appetite for UK risk meant the sterling market was never completely overwhelmed in 2018. Not that the sterling market felt congested at the start of the year, with January and February finding extremely strong demand in the currency. But by July, sterling spreads gapped out and some issuers with multi-currency platforms dropped sterling altogether to sell only dollars. Lloyds was involved in most of the US dollar securitisations, which kicked off with Clydesdale Bank’s Lanark 2018-1 RMBS in January, its first dollar tranche since 2013. Lloyds led a second Lanark, a deal for Virgin Money and one off its own Permanent shelf, and two from Santander’s Holmes programme, all with dollar pieces. “Our ability to take UK product to other credit markets is second to none,” said Appen. The bank brought sterling RMBS from smaller UK lenders too, including West Bromwich Building Society’s first deal in five years, and Aldermore’s first in four. It arranged a debut for Atom Bank, which operates exclusively over mobile phone apps, and led deals from specialist lenders such as Paragon and Charter Court. The Lloyds team credits its range of mandates to the planning work it carried out with smaller lenders to prepare them well in advance for the withdrawal of central bank liquidity schemes. “You don’t get paid for that advisory work but when you look how clients rewarded us this year; it’s been deal after deal,” said Cooke. More consumer mandates came from autos, where Lloyds was a lead on three UK deals and two German ones, and UK credit cards. And behind the scenes the bank has worked to build a private placement market for smaller UK and European asset-backed issuers. If the end of the TFS marked a turning point for the market, and played to Lloyds’ focus on the UK consumer, two of the year’s other big developments completely passed the bank by. Lloyds has no involvement in the leveraged loan CLO or CMBS markets, both of which grew strongly through 2018. But it is a sign of the bank’s strength in its core mandate that as well as topping the league tables for European deals excluding CDO and CLOs, it still is placed a respectable fourth when all deals are included. That focus doesn’t mean the bank can’t push the innovative, pointy-headed product too. It has built expertise in synthetic risk transfer, selling three deals at the end of 2017. One of those, Mespil Securities, was joint lead-managed

After four and a half years of preparation, interrupted by two general elections and a Brexit referendum, the UK government securitised in December 2017 some £3.54bn of legacy student loans, creating a new and highly complex asset-class. Sole arranger Barclays had been mandated in July 2013 and the end-result was Income Contingent Student Loans 1 (2002–2006), a securitisation so elaborate that its model came with a 90-page user manual to help investors run it. The type of student loans in question – which are only repaid when a borrower’s income crosses a certain threshold – had never been securitised before. This is a far cry from the various forms of consumer risk that generally are on offer in the European marketplace. The UK government had a £43bn book of broadly similar loans made to students who started university in 2012 or earlier, and wanted to raise £12bn by selling a portion over a five-year period. So this first deal had to be repeatable, but its very execution was in considerable doubt after a snap post-Brexit general election brought the initial marketing process to a juddering halt a couple of months after it was officially unveiled early in 2017. The deal then failed to immediately reappear after the June election due to the uncertainties of a hung parliament and when it did, it had to cope with heightened concerns about the UK economy after Brexit. But such was the debut’s success that the government’s £15bn issuance target was hiked by an additional £3bn in the 2018 Autumn budget: marketing for the second deal began in October. The securitisation targeted a £3.54bn portion of the oldest loans in the pre-2012 book, arguably the weakest cohort as this contains a higher proportion of lower-paid borrowers, because the better-paid ones have already repaid. The ABS raised £1.7bn, a 51% discount. And unusually for a European deal, especially of this size, the complete capital stack was publicly sold to investors. There may only be around 20 dedicated sterling buyers but around 200 different accounts were involved in the marketing process, which included over 90 physical meetings. “There were five iterations of engaging investors, which was absolutely unprecedented,” said Edward Ballin, a director at Barclays. “I’ve never witnessed this sort of intensity over this sort of time period.” Close to 40 investors participated in the deal. While the £810.573m Class A1 (rated A/A) targeted traditional ABS investors, the £697.057m A2 (A/A) was designed for insurance companies, selling fixed-rate scheduled amortisation paper. Below the seniors came the £120.61m Class B (BBB) RPI-linker, and at the bottom of the stack the unrated deeply discounted Class X, which was sized at £1.919bn and came at an 8.5% cash price, raising £163m for the government. The challenges around this tranche should not be underestimated, with one investor likening it to looking into a crystal ball. Barclays, Credit Suisse, Lloyds and JP Morgan were joint bookrunners. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.

Clifford Capital’s first securitisation of project finance loans revived Asian interest in collateralised loan obligations, created a new asset class for the region and enhanced Singapore’s claim as a centre for infrastructure financing. Singapore-based Clifford Capital set out to find a way to bring more institutional investment into infrastructure in Asia-Pacific and the Middle East, and settled on a structure that would overcome many of the hurdles in attracting fund managers to individual projects. The portfolio approach, with dozens of project finance loans as the underlying collateral pool, appealed to buyside investors looking to diversify, and freed up bank balance sheets for the next round of projects, creating a template for future deals that can help close Asia’s infrastructure funding gap. Clifford Capital sourced 37 loans from five institutions, as well as its own book, covering 30 projects. Australia, Indonesia and Vietnam were the biggest exposures, accounting for a combined 47.7% of the pool, but the portfolio also included frontier markets such as Papua New Guinea and Mongolia. Around three-quarters of the underlying projects were already operational, and many of the loans had support from export credit agencies or multilateral institutions, helping to boost the ratings of the securities to a high investment grade. Banks were required to hold on to part of the exposure to ensure their interests were aligned with investors in the CLOs. A sensible premium over CLOs in the US market helped generate momentum in tricky conditions in July – perhaps the worst month of the year for the Asian credit market – and the lead managers lined up substantial anchor orders before launch. Bookbuilding ran for a week, with some fund managers needing to complete internal approval processes, given that this offering was the first of its kind. The Reg S securities attracted strong demand from a variety of investors, with Asia booking 65% of the notes, Europe taking 23% and the Middle East 12%. A broad range of investors participated, including bank treasuries, insurers, asset managers, pension funds and endowment funds. A US$320.6m Class A tranche, with an expected rating of Aaa (Moody’s), was priced at six-month Libor plus 145bp with a weighted average life of 3.7 years and an expected maturity of 7.4 years; a US$72.6m Class B tranche rated Aa3 was priced at 195bp over with a WAL of 8.6 years and expected maturity of 9.4 years; and a US$19.0m Class C rated Baa3 was priced at 315bp over with a WAL of 9.8 years and expected maturity of 10.4 years. A US$45.8m subordinated tranche was retained. Initial guidance for the Class A tranche was Treasuries plus 140bp–150bp; 185bp–195bp for the Class B tranche; and 315bp area for the Class C tranche. Bayfront Infrastructure is the issuing vehicle and Clifford Capital is the collateral manager. Citigroup and Standard Chartered were joint global coordinators. DBS, HSBC and SMBC Nikko were joint bookrunners, and MUFG was co-manager. To see the digital version of IFR Awards 2018, please click here. To purchase printed copies or a PDF of IFR Awards 2018, please email gloria.balbastro@refinitiv.com.