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REO has transacted the first CMBS deal in Ireland Back  
The new year got off to a busy start for the teams in Treasury Holdings and Eurohypo, as they prepared for the launch of Ireland’s first-ever commercial property securitisation, announced on Monday, January 16th, 2006. Guy Leech, describes the process and the roadshow.
We saw the potential of Commercial Mortgage Backed Securities (CMBS) for Real Estate Opportunities (REO) plc in terms of refinancing its debt about 18 months ago, and we started looking at how to make it work in an Irish context around that time. We realised that we could achieve annual interest savings of about €3 million, repay existing bank debt, and free up cash for further expansion opportunities.
Guy Leech

We chose securitisation over other funding methods because it had become much cheaper in 2004, and that pricing advantage remains. Also the terms of securitised debt are much more attractive now, than they were a few years ago, in particular in respect of limited amortisation and covenants.

REO is a closed-end investment company formed in 2001 and incorporated with limited liability in Jersey. It is listed on the London, Dublin and Channel Islands Stock Exchanges. Treasury Holdings, one of Ireland’s top property groups, is REO’s Irish property investment advisor and the majority shareholder.

The Irish property portfolio has been remarkably successful for REO. Because of its exceptionally high quality property portfolio in Ireland – including landmark properties in excellent locations, with very long leases and blue chip tenants such as Bank of Ireland, Tesco, FAS, KPMG, and Mason Hayes & Curran – it was an attractive prospect for securitisation.
'The combination of a Euro denominated issue with much longer lease lengths than typically exist in other Eurozone countries made it particularly attractive to the German and French fund managers.'

A beauty parade was conducted amongst half a dozen leading arrangers of CMBS deals and the chosen arranger was Eurohypo, Europe’s leading commercial real estate bank. Morgan Stanley acted as Bookrunner on the issue which was rated by Standard & Poors and Fitch.

We agreed a €375 million seven year loan, secured against 16 retail and office properties – 15 in Dublin and one in Cork. This covers €500 million of REO’s €850 million Irish properties.

As this is the first single large real estate loan to be securitised in Ireland, there were a number of legal and tax issues which had to be addressed in putting the financing together and Eurohypo’s experience was very valuable in this regard. They and a large team of lawyers and accountants have been working flat out on structuring the transaction since last May.

Once the securitisation was announced to the Stock Exchanges, we started on a round of presentations to investors across Europe. Knowing this was the first opportunity for investors to get involved in Irish property in this way, we felt like pioneers! The roadshow team included John Bruder, Guy Leech and Joe Simpson from Treasury Holdings, Hugh Fraser and Caroline Philips from Eurohypo, and Callixte Tillette de Clermont-Tonnerre and Romano Paredes from Morgan Stanley.

We met about 50 different fund managers in London, Dublin, Paris, Munich and Frankfurt during our six days on the road. Many of these were one to one meetings and we also had lunches in each place for groups of fund managers. The issue was universally well received – the quality of the properties, tenants and management was just right for the CMBS market and the fact that this was the first ever Irish CMBS deal attracted a lot of interest. The combination of a Euro denominated issue with much longer lease lengths than typically exist in other Eurozone countries made it particularly attractive to the German and French fund managers.

The issue ended up being substantially over-subscribed and as a result, Morgan Stanley achieved fantastic pricing for us – a margin of 19 basis points on the AAA tranche and 29.5 basis points overall. This was significantly cheaper than the CMBS issues in the last quarter of 2005, and was a huge vote of confidence in our portfolio and in the Irish property market generally.

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