Europe Sees First Public CMBS in Two Years

British supermarket giant Tesco successfully marketed the first commercial mortgage backed securitization (CMBS) on the continent in two years with a sale and leaseback deal worth $690m. It may hardly be a sign that the beleaguered commercial markets in Europe are on a revival, but analysts still believe the move is a positive for the industry. The CMBS market over there suffers from refinancing difficulties as the investor base eroded away two years ago, in part, as Special Investment Vehicles (SIVs) wound down. Liquidity on current CMBS platforms, especially those that are UK based, is virtually nonexistent: a concern as some many are due for refinancing by year’s end. Nonetheless, Tesco Property Finance, consists of a single, fixed-rate tranche (single-A minus rated) backed by two loans secured by 12 supermarkets and two distribution properties being leased on long-term leases with upward rent review to Tesco subsidiaries. The supermarket is serving as its own swap counterparty and Goldman Sachs is running the books. The supermarket does have some flexibility to sell properties and add new properties to the pool. The CMBS bonds are fully credit-linked to the Tesco corporate rating, according to Barclays Capital. International Financing Review states that the 330 basis point spread priced inside guidance. “We would expect the pricing to confirm the discrepancy between the fixed rate and floating rate CMBS markets, with the former providing more attractive funding for issuers,” said Hans Vrensen of Barclays Capital structured finance research. “Regardless of the misalignment of fixed and floating-rate markets, we would see a successful placing of these bonds as a positive sign for the long-term viability of the European CMBS sector.” Write to Jacob Gaffney.