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European market innovations center on CMBS
Asset Securitization Report--SourceMedia (January 8, 2007)

Nora Colomer

As the European securitization market matures so does its repertoire of deals. Gone are the days of extreme innovation. Instead, the market is increasingly defined by steadiness and dependability. This is demonstrated by the steadfast pricing spreads over the past year. But a lack of innovation did not mean a lackluster year - 2006 still had its share of shining stars that stood out in the record mix of deals, specifically in the CMBS market.

In terms of volume, the European CMBS sector has come into its own. After several years of false starts, the market is on its way to becoming a mainstay for European securitization. The sector saw Terra Firma's gigantic 5.4 billion ($6.87 billion) German multi-family deal, German Residential Asset Note Distributor PLC (GRAND), which was noteworthy for its size alone.

Another strong contender for European standout deal of the year is the Sainsbury plc supermarket CMBS. The U.K. supermarket's Longstone and Eddystone Finance transactions issued in March 2006 used up the company's entire corporate bond outstanding. At GBP2.07 billion ($4.05 billion), the deals combined totaled one of the largest CMBS deals to date.

Morgan Stanley and UBS were joint bookrunners on both the deals. Longstone Finance plc securitized GBP870 million of 25-year fixed rate notes secured by 52 supermarkets with a market value of around GBP1.55 billion. Longstone Finance offered three fixed rate tranches, including: GBP542.4 million ($947.9 million) of 14.7-year triple-A notes; GBP46.5 million of 25-year double-A rated notes; and GBP278.9 million of 25-year, single-A rated notes.

Eddystone Finance plc securitized GBP1.2 billion of 12-year floating rate notes with a call and step-up after seven years, backed by 75 supermarkets that have a market value of about GBP2 billion. The transaction offered investors GBP617.1 million of 5.4-year notes and GBP420.8 million of seven-year notes with a 42% LTV. Two subordinated tranches rated double-A and single-A sized at GBP140.3 million ($245 million) and GBP220.4 million with 49% and 60% LTVs, respectively, were offered.

These transactions were structured with lower levels of debt than a traditional CTL but are tranched through the capital structure and achieved ratings that are delinked from the retail tenant. The ratings on the two transactions exceeded the long-term triple-B minus rating on Sainsbury. According to Standard & Poor's analysts, the transaction was innovative in that Sainsbury repaid all of its unsecured debt and replaced it with secured CMBS financing.

They both employed a straightforward secure loan structure and both deals are tappable. The portfolios of supermarkets backing each deal are leased on a 30-year term with their note ratings not explicitly linked to Sainsbury's. The absolute level of leverage at the A' level is low at 56% initial rated debt to market value for Longstone and 60% for Eddystone. Both transactions are structured to allow investors to get access to the underlying real estate in a manner not dissimilar to a traditional CMBS.

The proceeds from the deals were used to repay all of Sainsbury's outstanding unsecured debt and make a contribution to its pension plan at a time when the company faced mounting debt problems and the threat of a rating's downgrade. The company reduced its annual interest cost by GBP12 million and cut its GBP582 million pension deficit by more than half. The use of CMBS to reduce a pension scheme deficit is an option likely to be copied by other retailers looking to cash in on rising real estate values.

Also notable is Arsenal Soccer Club's GBP260 million ticket receivable CMBS transaction that incorporated the complex dynamics of player costs, team performance and fan loyalty. The secured long-dated bonds refinanced the shorter-term construction loans used to fund the new home of Arsenal's London based Emirates Stadium. It's the first public securitization of football assets seen in the last three years and, unlike previous deals, that relied almost exclusively on the value of a stadium or commercial rights, the Arsenal transaction featured innovative covenants and mechanisms to help ensure the long term survival of the club and gave the deal the feel of a whole business securitization. The offering is primarily a securitization of ticket receipts, although it also benefits from Arsenal's other income streams and assets.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.



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