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CoStar Column: European CMBS - back in from the cold?

By Iain Balkwill - Friday, February 09, 2018 7:00

The news that Deutsche Bank is in the process of marketing a number of Agency deals can be considered a positive shot in the arm for an otherwise subdued primary issuance market, writes Iain Balkwill, Partner, Reed Smith.

Not only do these transactions provide a clear indicator that there is still appetite and interest for CMBS product, but hot off the heels of two BAML deals at the end of last year, CMBS can be said to be enjoying a period of renewed vigour, which is something that has not been seen since the summer of 2015, when adverse macro-economic factors precipitated by concerns over Grexit and the Chinese financial crisis shut down primary CMBS issuance.

Indeed when it comes to the origination of large loans, not only does CMBS provide the ideal source of financing but more specifically Agency structures are the perfect tool to be deployed in order to achieve this. From the banks’ perspective, not only do these structures allow them to satisfy borrower demand for debt at competitive pricing as well as meet fixed income investor demand for product, but these structures remove the need for them to deploy their balance sheet and assume significant pricing arbitrage risk caused by the volatility in the capital markets.

As borrowers prepare to join a conveyor of escalating interest rates, the apparent revival of Agency CMBS should be welcomed, however the unfortunate reality is that this could just be an anomaly given the European legislature’s adverse capital treatment of CMBS under Solvency II and the recent decree that CMBS will not qualify as a simple, transparent and standardised securitisation under the Securitisation Regulation. The future of CMBS therefore lies in the hands of the regulators and in that vein, the sooner they realise that CMBS has an important role in creating a sustainable, resilient, diversified CRE debt market, the better.

Iain Balkwill, Partner, Reed Smith

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