* Agency format may enable issuer to escape risk retention rules
* Prime quality of assets points to tight pricing
By Anil Mayre
LONDON, August 1 (IFR) - A new UK commercial mortgage-backed transaction from a joint venture between Westfield Corporation, Algemene Pensioen Groep of the Netherlands and Canada Pension Plan Investment Board has the potential to establish a template for so-called agency deals that can sit out of the reach of regulations requiring the borrower to retain a portion of risk.
Lead managers Credit Agricole and Deutsche Bank marketed the £750m Westfield Stratford City Finance transaction this week. It is backed by the Westfield shopping centre in Stratford, east London, and is the biggest CMBS this year.
The transaction is a single, five-year tranche rated Triple A by Fitch and DBRS. The format has a number of benefits for the issuer, as well as other companies with big-value assets to back debt transactions. For a start, structuring only Triple A notes is cheaper for the issuer than selling lower-rated notes down the structure.
In addition, it is considered an agency deal by the parties as it does not involve the securitisation of a new external loan, which would be subject to the scrutiny of both the originator and investors so their economic interests could be aligned.
The underlying property is directly financed through the capital markets via a CMBS - the SPV selling the notes is making the loan to the borrower. As such, the issuer says it is not a securitisation as defined in the updated 5% risk retention rules that came into force on January 1 (Article 405 of the Capital Requirements Regulation and Article 17 of the AIFMD) and that it therefore does not need to retain any bonds.
This risk-retention concept was introduced in 2011 under the EU’s second Capital Requirements Directive to more closely align interests, which the originate-to-distribute model that preceded the financial crisis clearly did not do. And the most recent change to the rules can suit issuers such as Westfield well.
“The previous CRD 2 retention framework was explicit for institutions that transferred loans to an issuer that issues notes, requiring them to maintain skin in the game. But it was not clear about agency transactions and so, because of the uncertainty, there was some retention when agency deals were carried out,” said Clive Bull, director at Deutsche Bank’s commercial real estate team.
In the Capital Requirements Regulation, he said, it was clear that deals where loans are not transferred to the issuer from a third party do not fit the regulatory definition of securitisation.
In this instance, the SPV issues £750m of notes, the proceeds of which are loaned to the issuer to refinance existing debt. There is no external bank financing.
SINGLE CLASS CRR rules also define securitisation as exposures that are tranched into various levels of risk, but this deal is a single series of notes. Its exclusion from securitisation retention can also be argued from this standpoint, a CMBS analyst noted.
Digging deeper into the transaction details yields further evidence. The £750m deal is backed by an asset valued at £1.95bn, equating to a loan-to-value ratio of just 38%. And with the issuer having such a chunky equity stake in the project, it suggests that interests are aligned, the analyst said.
Final decisions on whether retention is required will be made by investors’ regulating bodies, because under the retention rules the onus is on the buyer to ensure compliance. But other supporting evidence for not being classified as securitisation for skin-in-the-game rules links to the Recital 50 clause of CRR.
This states that exposures creating a direct payment obligation for a transaction used to finance or operate physical assets should not be considered securitisation, even if the payment obligations have different seniority. And so, in theory, the issuer could still claim this deal did not fall within the grasp of retention rules even if it had more than one tranche.
The CRR rules only affect whether the deal is classified as securitisation for retention purposes, and not how risk weightings and capital charges are assigned for the buyers.
“It is still treated as an ABS, as it is issued through an SPV and has structured finance ratings,” said Bull.
Nonetheless, CRR would encourage large borrowers to look at agency deals, he said. They will still be classified as CMBS because there is real estate asset risk, but there is no retention need going forward. TIGHT PRICING The prime nature of the asset is reflected in the initial price indications. The leads opened discussions at three-month Libor plus 80bp-90bp, which a syndicate official said was “definitely the lower end of the market”.
Close comparables are sparse. The previous UK CMBS came last month from Bank of America via Taurus CMBS 2014-1. However, it was backed by a markedly different portfolio of 132 secondary quality assets. Its 2.1-year Triple A printed at 140bp at the end of June.
The CMBS analyst noted that Broadgate Financing senior notes were quoted at 92bp with a 7.8-year average life.
Tesco Property Finance 6 was mentioned by a CMBS trader, seen in the Gilts plus 90bp area. The Tesco deals, however, are credit-linked to the quality of Tesco as it is the main tenant. In that respect that series differs from the Westfield deal in that the bonds in the latter will not be directly linked to the credit quality of one occupier. (Reporting by Anil Mayre, editing by Chris Spink)