Review of 2014 and tips for listing CMBS in Ireland
According to market sources, Euro CMBS issuance in 2014 totalled €3.6 billion. Walkers was pleased to act on a number of high profile Euro CMBS transactions during 2014, which in aggregate involved the issuance of €1.535 billion of notes, representing over 40% of all Euro CMBS issuance in 2014. Q3 and Q4 of 2014 witnessed the majority of our CMBS activity with deal sizes ranging from €250m - €679.9m, and spanning a number of European countries. In our capacity as Irish legal and tax counsel and Irish listing agent, we were pleased to act on a variety of transactions including the first European multi-loan CMBS since the financial crisis.
Forecasts for 2015 primary issuance stand between €5 billion and the more bullish predictions of €8.5 billion - a busy and exciting time ahead for European CMBS participants. It is expected that CMBS has made a permanent return to the European real estate debt finance landscape and with this is mind, we provide a flavour of our CMBS experiences during 2014 along with some helpful insights and recommendations in respect of the Irish Stock Exchange (ISE) listing process.
What did we see from European CMBS in 2014?
Walkers acted on transactions spanning a number of jurisdictions including Italy, the Netherlands, the U.K. and Germany, and if market predictions ring true, we expect to see an extension of the jurisdictional reach during 2015. Additional jurisdictions which were active in the CMBS space in 2014 include France and Greece, however upon a review of total ISE listed CMBS products, the UK and Italy appear most active.
Ever since the credit crisis, the market has stalled in Europe and was initially dominated by the refinancing of multifamily portfolios. 2013 and 2014 may be seen as breakthrough years for the re-establishment of CMBS in Europe and the recognition of CMBS as an important financing tool for European commercial real estate. A number of positive structural features have been implemented in European CMBS 2.0 transactions with the aim of improving confidence in the European CMBS industry. There has been a notable movement from CMBS being primarily used to refinance properties to transactions providing financing of new acquisitions and others involving multi loans and a greater acceptance of complexity among investors. We have also seen an increasing volume of CMBS deals backed by secondary commercial real estate.
We were pleased to act on a variety of transactions including:
- Single loan, single borrower
- Single loan, multi-borrower
- Multi-loan, multi-borrower
While the securitised properties of some transactions have focused on retail shopping centres and supermarkets others have included a wider variety of assets in terms of quality and of property type (including office buildings and hotels).
Market Preference for Regulated Market listings
It is interesting to note that each of the CMBS transactions on which we acted in 2014, and indeed in the past, has listed on the regulated market of the Irish Stock Exchange rather than on the unregulated Global Exchange Market. When listing on the regulated market a prospectus must comply with the disclosure requirements of Directive 2003/71/EC (the “Prospectus Directive”) and Commission Regulation (EC) No. 809/2004 (the “Prospectus Regulations”) and entails a dual prospectus review by the Central Bank of Ireland (CBI) and the ISE.
The outlook for 2015 is upbeat. It is expected that the market’s volume will continue to grow as is investors’ appetite to buy CMBS backed by a wider variety of assets. Continued growth is expected on account of the continued low interest rate environment, the ECB’s potential appetite for European CMBS following the recent announcement that the ECB is to embark on a large-scale quantitative easing programme and the fixed income investors’ desire for yield. On the borrower side, there is also growing demand for CMBS. A certain level of uncertainty remains including with respect to insurance investors facing the adoption of Solvency II and bank investors following the determination of the Basel Committee. Regulatory developments are likely to have a significant impact on investor demand for European CMBS in 2015.
Listing a CMBS transaction on the Irish Stock Exchange - Key Considerations:
As the number of CMBS deals appears to be on the rise, we would like to share our experience of the listing and approval process with you and hope that our familiarity and observations will assist you in managing future CMBS listing applications.
We recommend that a 1-2 page summary of the transaction be provided to the CBI when filing the initial draft prospectus for review. The summary should highlight the role of the principal parties to the transaction; brief description of borrowers; identify the key properties; and include a detailed explanation of the cash flow, clearly indicating how interest and principal payments will be funded. In our experience, providing the CBI & ISE with such a summary will facilitate an understanding of the mechanics of the transaction at an early stage in the review process.
A Valuation Report is an essential consideration for any CMBS product and a copy of the valuation report(s) relating to a CMBS transaction must be included as part of the prospectus. In the past 12-18 months we have seen valuation reports provided in one of two forms (a) Long form valuation report or (b) Desktop/Short form valuation report. Either version is acceptable to the CBI provided that the version which is included addresses the specific disclosure requirements of Annex VIII, Item 2.2.16 of the Prospectus Regulations i.e. the valuation report relating to the property must set out both the valuation of the property and the cash-flow/income streams.
One of the key disclosure requirements of the CBI in a CMBS transaction is the information provided on the borrower(s) of the underlying loans(s). Identifying the number of borrowers responsible for repayments under the loan(s) will assist in determining the level of information to be disclosed on the borrowers. For example, if the transaction involves 6 or more borrowers, and no one borrower accounts for 20% or more of the value of the underlying loan(s) (in aggregate), a general description of the borrowers will be sufficient. However, where the number of borrowers is 5 or fewer, or where a single borrower accounts for excess 20% of the value of the underlying loan(s) (in aggregate), information must be provided for each borrower as if that borrower was itself seeking to list.
- Is the borrower an investment fund or a trading company? The level of disclosure will differ based upon the business purpose of the borrower. It is not unusual to see a combination of investment funds and trading companies acting as borrowers in a single CMBS transaction.
- How long have the borrowers been in existence?
- Have the borrowers produced audited financial statements for at least the last two financial years? If the borrowers have produced both consolidated and standalone accounts, it is the consolidated accounts that must form part of the prospectus;3
- If audited financial statements exist, are the English translations readily available? The financial statements to be reviewed, and included, in a prospectus must be provided in English.
Once we have identified the borrower(s) and have determined their business purpose and financial history, we will be in a position to advise on the disclosure requirements applicable to such borrower(s).
Incorporation by Reference Vs Appendices
The valuation reports and borrower financial statements must form part of the prospectus. Some issuers have included such reports as appendices to the prospectus while others, where possible, have chosen to incorporate the reports by reference. As the final prospectus must be provided in the form of a single, fully searchable PDF document, it is worth considering the size of each valuation report and audit, to determine how the final prospectus should be constructed.
Prospectus Review & Derogation Request
As each CMBS transaction will have its own unique features, we recommend that an issuer should factor 4-5 submissions with the CBI/ISE. Depending on the status of the borrower(s), a derogation from financial disclosure requirements may also be required, and should be factored into the transaction timeline.
The typical turnaround times for a prospectus review and derogation request are as follows:
- Prospectus Review: 3 business days initial review + 2 business days per subsequent review
- Derogation Request: 5 business days initial review + 3-4 business days per subsequent review
We recommend that the listing process should commence approximately 6 weeks prior to closing in order to provide sufficient time for the ISE and CBI reviews. In our experience this timing coincides with the timelines of CMBS transactions generally so the listing process should run in tandem with the drafting timeline and in accordance with the envisaged closing deadline.