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APB Annual Seminar: Property Finance – The Road to Recovery ‌ 21 Sept 2010

CMBS & Funding Alternatives. Caroline Philips Eurohypo AG, Head of Structured Debt Products. APB Annual Seminar: Property Finance – The Road to Recovery ‌ 21 Sept 2010. Contents. Overview of the European CMBS Market The situation today What may happen next Not many jokes I’m afraid….

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APB Annual Seminar: Property Finance – The Road to Recovery ‌ 21 Sept 2010

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  1. CMBS & Funding Alternatives Caroline PhilipsEurohypo AG, Head of Structured Debt Products APB Annual Seminar: Property Finance – The Road to Recovery ‌ 21 Sept 2010

  2. Contents • Overview of the European CMBS Market • The situation today • What may happen next • Not many jokes I’m afraid…..

  3. €billion Year Current CMBS Market Overview European CMBS Issuance • >€100bn of European CMBS remains outstanding • New issuance has effectively ceased • Majority of CMBS issued towards the peak of the capital value cycle 2005-2007 • This issuance is generally: • Still held within the banking system rather than by ‘real money’ investors; • Ultimately secured by properties that are broadly larger and of slightly better quality than average; • Secured by loans that are in negative equity and will fail to refinance; yet • Debt servicing remains relatively secure. • Principal risk overhanging CMBS (absent a further deterioration in the occupational markets) are the high LTVs and the lack of refinancing available. Source: Eurohypo

  4. CMBS Refinancing Maturity Profile of CMBS Loans and Bonds (€bn) • €34bn of CMBS will mature by 2015 • Much of this debt is over-levered and in negative equity • Unlike on balance sheet lending, CMBS maturities cannot readily be extended • Without strong sponsors to aid refinancing, forced sales of properties are likely • Some creditors will realise losses • Debt will still be required to help fund these assets • Even at today’s lower leverage levels, this debt quantum is massive • Where will the new debt come from? • Not the banks… • Covered Bonds? New CMBS? Source: Standard & Poor’s

  5. Are Covered Bonds the answer? • Covered Bonds are a massive market of over $2trillion used by banks primarily to fund mortgages – largely residential but some commercial. Germany, Spain, Denmark, France and the UK are the biggest users (>80% of the market) • The resilience of this market, and the German Pfandbrief market specifically, is the reason why German banks have continued to be active funding real estate • Many countries have specific Covered Bond legislation designed for ease of structuring and (crucially) to promote investor confidence. Others eg the US looking to introduce such legislation • Covered bonds cannot, unlike CMBS, act as a capital source for the commercial mortgage market, but they are an incremental financing tool to support the commercial real estate market • Covered Bonds will be part of the answer, but will never be the whole answer

  6. When will primary CMBS return? • Some problems with legacy books, but trading still happening: • Investors have recently made money in CMBS due to significant spread tightening • But mainly hedge funds, opportunity funds and proprietary and flow trading desks at banks….not many ‘real money’ investors • So how come no CMBS issuance yet? • The US market has returned, and we are now seeing CMBS lenders starting to lend again • £ and € RMBS has returned: the driver of the European ABS market • European problem: • Historic AAA investors all but gone (SIVs, ABCP conduits) • Those investors remaining are buying in the (cheap) secondary space • Still nervousness about the underlying economy and real estate sector specifically • But we need the capital markets to play a role in the funding of commercial real estate….. UK CMBS Spreads (bp over 3mL) Source: Markit Current Pricing Yields on CMBS rose significantly between 2007 and Q2 2009. CMBS spreads have tightened sharply since then as a result of a recovery in prime property values. CMBS spreads remain high compared to other credit sectors. Compared to alternative sources of real estate finance, CMBS spreads are too high to support new CMBS issuance.

  7. The role the Capital Markets could play • There are capital markets investors that want to invest in commercial real estate debt • ‘New’ CMBS will develop: • A lot of people want it to happen. • This time around it needs to be attractive to real money investors: like in the US: • Longer duration paper; • Fixed as opposed to floating coupons; • Lower LTVs; and • Less tranching • Care re regulation • We need some stability in the underlying real estate markets • In the meantime: • Direct participation in the senior loan market • Mezzanine funding

  8. Eurohypo AG is authorised by the Bundesanstalt für Finanzdienstleistungsaufsicht.

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