The Rumors are True: CRE CLOs Go Global
Over the past few months, rumors have circulated that commercial real estate collateralized loan obligations (CRE CLOs), a securitization that has seen record levels of issuance in the US in 2021, could be making their way to the European market.
Just a few weeks ago, those rumors rang true, and the first, broadly distributed, European CRE CLO transaction after the Great Financial Crisis was recently announced, Starz Mortgage Securities 2021-1 DAC.
The deal is a static CRE CLO securitization with the issuance of both GBP and EUR denominated notes. KBRA assigned preliminary ratings to ten tranches on 1st October.
About the Deal
The underlying portfolio comprises nine commercial mortgage loans secured by 17 properties split between six GBP-denominated loans and three EUR-denominated loans. One of the defining features of these transactions is the transitional nature of the underlying loans, with short-to-medium term maturities. As reported by KBRA, the weighted average seasoning in this deal is 20.5 months, and the loans’ maturities range from 2022 to 2025, with more than 80% maturing between 2024 and 2025. The loans were all originated by the sponsor, Starz Mortgage Capital Ltd.
It is worth noting that there are no ramp-up or reinvestment provisions, but the sponsor has the ability to make significant modifications to performing loans subject to certain restrictions and criteria, and dispose of credit risk and defaulted loans.
This transaction also includes separate par value tests and interest coverage tests (the note protection tests) for each currency pool to the benefit of the IG-rated notes. As explained by KBRA, if the note protection test for any respective currency pool is not satisfied on any determination date, on the following payment date, interest proceeds that would otherwise be available for payment to the more junior and subordinated notes will be used to pay down the principal balances of the IG-rated notes of that respective currency, in sequential order until the tests are satisfied. If available interest proceeds are insufficient, available principal proceeds will be used for such a purpose.
While we have been repeatedly hearing rumors over the last few months about a potential emergence of this type of deal, this is a landmark transaction for the European market, particularly with the comeback of CMBS observed this year.
Given the lack of transactions in Europe, it is useful to get a glimpse of the activity across the pond and appreciate the difference versus CMBS as a funding tool. The US CRE CLO market is booming, with year-to-date issuance at $33 billion and there are still three months left of the year. To put that into perspective total US CRE CLO issuance in 2019 was $19 billion. In fact, earlier this month, Trepp reported that in Q3 2021 alone, US CRE CLO issuance reached $12.6 billion spread across 13 transactions.
CRE CLO vs. CMBS Transactions
CRE CLO is an interesting asset class and provides a different way of financing commercial real estate than CMBS. CMBS deals are typically ten-year fixed rates, whereas CRE CLOs are typically three-year floating-rate bonds. As mentioned above, the nature of underlying loans is different, with CRE CLOs featuring transitional loans whereas CMBS collateral is backed by stabilized assets with predictable cash-flows. Finally, the manager in these deals typically is the loan originator and also retains the most junior part of the capital stack. Also, as recently noted by our head of EMEA & APAC, Vivek-Anand Dattani on a Trepp x European DataWarehouse Webinar, the manager's flexibility of servicing and managing the pool of loans, which is available in this new transaction, has served the US CRE CLO market well during the pandemic.
While this is the first deal of its kind in Europe, as discussed previously, US CRE CLO issuance for 2021 is booming to record levels so as Trepp continues to monitor the US markets we will also keep a close eye as to whether the European market follows suit and if similar deals continue to price over the coming months.
Trepp is acknowledged as the market leader in providing data and analytics to the CMBS, CRE & CLO markets. Trepp’s European Headquarters, located in central London, has teams focused on European data, modelling and content within all three asset classes.
Disclaimer: The information provided is based on information generally available to the public from sources believed to be reliable.