| Not such a Monumental task (second time around) |
Back |
| John Bowe says that the second time Anglo Irish Bank brought a CMBS to market, it proved to be a lot less painful than the first and very successful. So much so that Anglo is now planning its first Irish CMBS transaction, which it expects to launch in the first half of 2003. |
In June of this year Anglo Irish completed its second securitisation of UK commercial mortgages raising GBP400 million in the process. The transaction set a new benchmark in terms of the bond pricing achieved and established Anglo Irish as one of the most active securitisers of commercial property loans in the UK.
Just over 18 months prior to this, Anglo launched its first securitisation, Monument 1, in September 2000 which was a ground breaking deal and at the time, was the largest multi borrower CMBS (Commercial Mortgage Backed Securitisation) to come to the sterling capital markets. In approaching Monument 2 a key focus was to build on the success of Monument 1 and optimise the outcome. The release of capital which is the key driver for Anglo Irish to do the transaction allows the bank to continue to grow its lending both in Ireland and the UK. Consequently we wanted to maximise the capital relief but also to reduce the pricing of the deal second time around.
We also wanted to improve the structure to provide even greater flexibility in dealing with the clients whose property loans we place into the securitisation, to the point that we could deal with our clients in exactly the same manner whether their loans were in the securitisation pool or on the Anglo Irish balance sheet. This goes to the heart of the Anglo ethos which is very client relationship driven, such that we would never find ourselves in a situation where a client would detect any difference in the treatment he received whether his loan was securitised or not. Unlike some financial institutions that regard securitisation as a way of reducing the risk in their portfolio, Anglo Irish have always been more than happy to carry the risk.
The work begins
The process of securitising a pool really begins with assembling the database and creating the loan pool. This pool is then subjected to a very rigorous due diligence both by lawyers and by rating agencies and includes visits to over 50 per cent by value of the properties in the pool. This due diligence process lasts approximately eight weeks with the added complication that any loans added to the pool at a later stage (because of a repayment of a loan in the existing pool) also have to undergo the same process. Ultimately the pool consisted of 138 loans, secured by 273 properties and over 1,600 tenants.
The Anglo deal team
CMBS and indeed most securitisations are unique as fund and capital raisings in that they touch all aspects of the business of the bank, lending, finance and accounting, operations and IT. They also involve treasury in terms of pricing, rating agency management and capital market execution not to mention the regulatory aspects.
Given the breath of the issues involved it is essential to put together an internal deal team, which have the skills to manage all these aspects and critically have sufficient seniority to take decisions as they are needed. On the Monument deal term in addition to myself we also included our UK head of finance and operations and a senior lending manager.
The arranging bank
Another key team member is the arranging bank. We chose Merrill Lynch for the inaugural securitisation issue not only because of their expertise in securitisation, but also for their knowledge of commercial property finance. Following Monument 1 it made sense to work with Merrill again on the second securitisation and reap the benefits of two groups who had already gotten to know each other very well.
As a general rule we would believe it is important to work with different banks to support competition and to ensure we see different ideas and potential solutions and would expect to do so on future transactions.
Once the pool has passed the very onerous due diligence phase and rating agencies evaluation, indicative ratings are assigned and the sale process can begin.
The rating agencies
In a process like securitisation and possibly more so with securitisation of commercial mortgages the importance of the rating agencies to the outcome cannot be over emphasised. Their view largely determines the pricing of the bonds and the level of capital relief, which can be obtained. At another level, rating agencies have become the policemen on behalf of bond investors representing their interests in terms of what loans can be introduced into the pool, together with ongoing monitoring of how the pool is performing.
In our experience there is some level of disparity in the approach each rating agency takes in evaluating the risks in the pool and it is therefore critical to maintain a close and on- going dialogue to ensure that their issues are dealt with effectively and consequently that you receive the optimal ratings outcome. For Anglo Irish, approaching the rating agencies and developing a good dialogue at the earliest opportunity was a key ingredient to the success of the transaction and one area we improved on second time around.
We also found that introducing a level of competition between the agencies was also of value and so we approached all three (Moodys, Fitch and S & P) at the initial stage with the intention that we would only move forward with two. Undoubtedly this level of competition works in the interests of the client, notwithstanding that they still arrive at their own decisions independently.
Selling the bonds
Selling the bonds to investors is when the whole process comes together. The sales effort kicks off with a detailed research report, which covers all aspects of the pool of loans and is prepared by the arranging bank.
This is followed a couple of weeks later by the rating agency presale reports, which are regarded by the investor community as a key document addressing the risks in the transaction and assigning the ratings to the bonds. It is critical that the bank stays close to this document and negotiates any issues to ensure that it is entirely fair. For Monument 2 almost 80 per cent of the bonds were rated AAAl, the highest rating available, with the remainder carrying ratings between AA and BB at the lowest level.
The investor roadshow typically takes 1.5 weeks, visiting five-six investors a day and includes one or two investor lunches at which 10-12 investors each will attend. Bringing along senior lending managers on the roadshow was a huge benefit to the transaction and gave the investors the comfort that we had a deep understanding of our lending business, at the same time instilling a confidence that we know and manage our business extremely well.
The outcome
When Monument 2 was launched in June of this year the bonds priced better than our most optimistic expectations. Key ingredients for that success were;
• The first transactions had performed without any arrears or defaults and this was a huge boost when meeting investors second time around.
• The market backdrop was favourable. Timing is important and we decided to launch when there was relatively few competing deals and market sentiment was good.
• Preparation for the roadshow was critical. Having the right team ‘on message’ and a willingness to be open, honest and helpful in responding to investor questions paid dividends.
• Investors loved the diversity in the loan portfolio with its wide spread of property assets, property type, tenants and strong cash flow characteristics.
Securitisation has brought many benefits to Anglo Irish including some that were never envisaged at the outset. Strategically we wanted to create a new source of tier 1 capital to support the growth of the bank. As a secondary consideration we wanted to tap a different vein of funding which would not otherwise be available to us. In many ways these benefits were the obvious ones.
Unexpected benefits were the profile the transaction received from the UK property market. In many ways it reinforced the credibility and growing franchise of the Anglo UK operation and held up to close scrutiny the type and quality of our lending which would otherwise have been difficult to demonstrate in such a transparent way.
The performance of our securitised portfolio has reaffirmed our belief that our lending activities are among the best in the investment property market, which is essentially what investors bought into.
At another level the discipline, risk management systems and IT that will be required to meet the new Basle regulatory requirements for all banks have already been implemented to accommodate the rigorous requirements of securitisation and leaves Anglo very well positioned for Basle.
Following the two Monument transactions Anglo continues to see securitisation as a key part of our overall capital-funding armoury and is committed to further transactions. In this regard, we are moving forward our first Irish CMBS transaction, which we expect to launch in the first half of 2003.
There is no doubt that in moving from the first to the second securitisation things get easier. Systems are in place, knowledge and experience start to pay off and the painful steep learning curve is behind you. Additionally you get the positive momentum of already having a transaction, which is performing well. The worst part is over but you can’t get complacent as it is still about bringing the best possible deal to the market at the right time and that does take real effort.
There is no doubt that as an asset class, relationship orientated commercial lending is at the more demanding end of the securitisation spectrum and consequently does require considerable internal resource drawn from different disciplines but critically for Anglo it opens up a potentially deep vein of capital and funding, which will continue to support the growth of the bank. |
John Bowe is head of debt capital markets at Anglo Irish Bank.
|
| Article appeared in the September 2002 issue.
|
|
|
