Like much of the suite of ABS offerings, the CMBS story takes in low absolute rates, upheaval in traditional bank funding markets, financial engineering themes imported from the US and the herd mentality of the hunt for yield.
The first and most striking facet of this year's CMBS season has been the unprecedented growth of the sector, shattering consensus predictions. While still off the pace of US volumes, Europe has seen 75% more transactions this year, and looks on track to meet the magic US$100bn mark within a decade. The role of refinancings in this year's figures must be taken into account, however, as the pre-conditions that catalysed the 2005 flurry may not be repeated next year.
Basel II regulatory capital rules will impact both sides of the CMBS market: lenders have begun to model loan pricing under the new regime. Meanwhile, the favourable capital treatment for B-tranches is a driver to growth of the sub-investment grade market.
Information, or asymmetry of information, is one of the core issues in securitisation, in particular CMBS. Primary and secondary market investment decisions are heavily influenced by the quality and quantity of salient collateral reporting. The Prospectus and Market Abuse Directives offer the promise that disclosure without prejudice will become the norm for European CMBS transactions.
Against a backdrop of hot real estate markets and tight spreads, more investment banks and balance sheet lenders have become CMBS issuers. This race has generated intense competition to originate loans, capacity issues for banks juggling client and principal business, and a general bottleneck in the new issue market.
With increased pressure to source loans, has there been any significant change in lending standards? Borrowers have managed to extract increased leverage from the boom in CMBS lending and issuance. To compensate for this, covenants take on a new significance, and investors are scrutinising them very closely indeed.
B-note buyers have been vital this year taking down high-leverage exposure outside of rated securitisation. Without this demand centre, which provides underwriters with a quick exit for high LTV risk, lenders would not have been able to exploit Continental European opportunities so aggressively versus the bank market.
IFR gathered a group of the leading arrangers, traders, investors, lawyers and ratings analysts to discuss how it all came to this, and where we might go from here. Caroline Philips, attended from Eurohypo, alongside Shirish Godbole from Morgan Stanley and Deutsche Bank's Jonathan Pollack. Representing the investor base was Scott Goedken of LNR Partners while lawyers Charles Roberts and Peter Voisey attended from Cadwalader Wickersham & Taft and Clifford Chance respectively. RBS's Ronald Thomson spoke on behalf of research, while ratings input came from Rodney Pelletier of Fitch.