Hundreds of bankers, lawyers and surveyors are burning the midnight oil trying to securitise property debt. Billions are at stake and the prize is huge for the professionals who come up with a means of refinancing portfolios of problem properties.
The projects are all hush-hush and no one will reveal which loans, properties or companies are to benefit from the financial brain-storming. At least one firm of surveyors claims to be working on a scheme involving a mammoth “dustbin” company into which the four clearing banks can dump all their non-performing properties.
Unfortunately, all this work is likely to generate little in fees and less in completed deals in the short term. To date, there have been only two successful securitisations of property debt: the £90m securitisation of BHH’s property portfolio, now part of Bob Edmiston’s IM Group; the $178m commercial paper deal on Rosehaugh Stanhope Developments’ 135 Bishopsgate, EC2; and Barings’ securitisation of the rental stream from The Times’ building on Gray’s Inn Road, WC1.
What the BHH and RSD transactions had in common was a property company which was prepared to take a realistic view of the value of its assets. Securitisation is a means of packaging a loan or an income stream and selling it into a different market. The packaging may involve the use of credit enhancement which, to continue the analogy, covers the loan in attractive wrapping paper, thereby making it marketable to investors who might otherwise turn their noses up at property debt.
But the loan itself must be of good quality and backed by an excellent covenant. RSD’s credit rating may not be first-rate, but it was able to obtain the triple-A backing of credit enhancer FGIC for a commercial paper issue on 135 Bishopsgate. The American credit insurer was happy to oblige because it knew that the building was let to NatWest Bank and that the loan-to-value ratio was reasonable.
Rupert Clarke of Jones Lang Wootton sees more scope in packaging the income on a lease with a good covenant. “The real action is likely to be in the securitisation of rental streams where you can borrow up to 100% of the net present value of the lease,” he says. In such transactions, similar to the Gray’s Inn Road deal, the loan-to-value ratio on the property itself becomes almost irrelevant.
“Securitisation can do nothing about the underlying fundamentals of the market,” says Martin Kamarck of FGIC. “If you have too much debt in a property, there is nothing you can do about it . . . Someone has to absorb the debt.” According to Kamarck, what a credit-enhanced securitisation offers is access to liquidity. Where a borrower’s normal sources of funds have completely dried up, it provides an entry ticket to a wider and deeper market where cash is still available if you have the right name and the right face.
What this means is that a great deal of pain needs to be absorbed by banks and lending institutions before securitisation of property portfolios becomes a realistic option. To date, banks in the UK have been waiting for an end to the slide in values, unwilling as they are to accept that properties which cost millions to build may now be worth nothing at all. But delaying the write-offs and fire-sale exacerbates the problem; until a true market is re-established in second- and third-tier properties, refinancing the debt secured on those assets will be impossible.
In the US, the banks’ liquidity problem has virtually cut off all commercial property lending. In such an environment credit-enhanced securitisation provides a key role in helping solid companies to borrow on solid investments. If the British property lending market follows the US sector into the desert, who knows? We might see credit-enhanced fund-raisings from Hammerson, MEPC and Land Securities.
