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…..
1
Current CMBS Market Overview
■ >€100bn of European CMBS remains outstanding
European CMBS Issuance
■ New issuance has effectively ceased
■ Majority of CMBS issued towards the peak of the
capital value cycle 2005-2007
■ 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
68.9
70
60
€billion
■ This issuance is generally:
80
54.6
45.7
50
40
30
20
20.1
14.6
12.0
10
4.6
2.6
0
2003
2004
2005
2006
2007
2008
2009
2010
YTD
Year
Source: Eurohypo
■ 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.
2
CMBS Refinancing
■ €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
Maturity Profile of CMBS Loans and Bonds (€bn)
70
65.9
60
50
■ Without strong sponsors to aid refinancing, forced
sales of properties are likely
40
32.8
■ Some creditors will realise losses
30
■ Debt will still be required to help fund these assets
20
■ Even at today’s lower leverage levels, this debt
quantum is massive
10
24.1
17.8
15.1
14.4
10.4
■ Where will the new debt come from?
6.5
2.1
6.1
0
2011
2012
2013
Outstanding loan balance
■ Not the banks…
6.2
1.3
2014
2015
>2015
Outstanding note balance
Source: Standard & Poor’s
■ Covered Bonds? New CMBS?
3
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
4
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
UK CMBS Spreads (bp over 3mL)
5000
4000
3000
2000
■ So how come no CMBS issuance yet?
1000
■ 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:
0
Jan 08 Apr 08 Jul 08
AAA
Oct 08 Jan 09 Apr 09 Jul 09
AA
A
Oct 09 Jan 10 Apr 10
BBB
Source: Markit
■ Historic AAA investors all but gone (SIVs, ABCP
conduits)
Current Pricing
■ Those investors remaining are buying in the (cheap)
secondary space
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.
■ 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…..
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.
5
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
6
Eurohypo AG is authorised by the Bundesanstalt für Finanzdienstleistungsaufsicht.