The first securitisation of a commercial loan portfolio in Paris marks an important step in the evolution of property finance in France.
Wall Street is making inroads into the French property debt crisis. In a landmark deal, FFr 1.5bn of commercial property loans were securitised at the end of last year, in a transaction that may set a precedent for the way French banks deal with their bad property debt. In the longer term, securitisation of commercial mortgages could offer new financing techniques for property investment in France.
Managed and underwritten by Lehman Brothers, the securitisation involved the sale of a portfolio of loans by French bank Sofal to an Irish company, Belenus Securities. Belenus in turn issued a variety of floating rate notes to finance the acquisition. The securities, rated by Standard & Poor’s, were taken up by a broad range of institutional investors worldwide. Sofal, a subsidiary of UIC, part of the GAN insurance giant, had originally granted most of the loans at the peak of the French property market around 1991. The unpaid principal balance at the time of the securitisation, in December 1996, was FFr 1.54bn.
The portfolio included 427 loans secured on 406 commercial properties, mostly located in Paris and the surrounding area. Of these, 363 were secured by mortgages, 45 by pledges of shares from a commercial real estate company, and 19 by unsecured corporate loans.
By loan value, offices accounted for the largest share of property type, 44%, with retail representing 25%, hotels 12%, and industrial 9%. Residential and other property types accounted for 10%. Unlike the large debt portfolios that have been sold to US funds in the course of the past 14 months, the loans in the Belenus transaction were largely performing; only 4% of the portfolio was in arrears.
For the purposes of the securitisation, the loans were split into different classes, according to their risk, and separate notes issued against them. Some FFr 585.7m of the notes were rated AA by Standard & Poor’s. A further FFr 215.8m were rated A, while FFr 154.1m were rated BBB. In addition, FFr 588.2m of subordinated notes were unrated.
The floating rate notes issued by Belenus, paid interest at the Paris Interbank Offered Rate, plus a margin.
By comparison, 71% of the loans originally granted by Sofal were at fixed interest rates, at a weighted average of 10.23%. The remaining 29% floating rate loans carried an average interest rate of 5.76%.
To offset the risk presented by the fact that income from fixed interest loans was being used to pay off floating rate securities, several factors were built into the transaction, including an interest rate swap with Sofal, and an interest rate cap provided by Lehman Brothers. In addition, debt facilities were lined up with LaSalle National Bank to provide working capital (see diagram).
The properties were valued by Greenwich Bourdais on behalf of Standard & Poor’s. The weighted average initial yield assumed by the valuers was 10.73%. This was acknowledged by Standard & Poor’s to be “much higher than French market practices over the last 25 years, but conservative enough to allow that the market has not yet bottomed and investors may continue to push yields higher”.
The loan-to-value ratio of the portfolio was found to be 121%; at maturity of the loans, on average in 2004, the expected loan-to-value, allowing for scheduled amortisation of the principal, was put at 93%.
Mary-Stuart Freydberg, an analyst at Fitch Investors Service, which rated the transaction on behalf of potential investors, commented: “We think this business is here to stay [in France], and I don’t expect the Belenus deal to be unique. For the seller, securitisation offers a means of liquidity so that it can focus on new lending, not work-outs, while providing a profitable exit strategy for performing loans. For the purchaser, it enables them to diversify the real estate they have at hand and target the risk tolerance they need at that particular time.”
EuroProperty – March 97
