Deutsche Bank, UBS launch new CMBS

NEW YORK: Deutsche Bank and UBS announced today the US$1.4bn DBUBS 2011-LC3 new-issue CMBS transaction, the first multi-borrower conduit offered since Goldman Sachs and Citigroup scuttled a US$1.5bn deal post-pricing on July 28 due to an unexpected ratings withdrawal by Standard & Poor's.

Today's transaction comes during one of the most volatile post-crisis periods for the broader credit markets following S&P's unprecedented downgrade of the US sovereign rating to AA+, causing investors to flee risky assets en masse.

The deal's arrival also caps one of the most turbulent periods this year for US CMBS, following a July 27 criteria review announced by S&P that led to the firm withdrawing ratings on two deals and suspending the assignment of all new-issue ratings.

A dimming global economic outlook compounded the uncertainty in the market, causing a third deal to get pulled last week.

S&P's ratings glitch and criteria review occurred because it discovered its new-issue ratings team and surveillance team used "conflicting methods" of determining debt service coverage ratios (DSCRs) for rating CMBS deals.

S&P staged a drastic U-turn last Friday, however, saying that based on an initial criteria review, it would resume assigning ratings to new conduit-fusion CMBS transactions. It also found that its ratings teams actually used consistent methods.

Moody's subsequently came out with a report saying that its new-issue and surveillance teams use consistent methodologies.

Given S&P's recent ratings snafu, however, it is not surprising that this week's DBUBS transaction is mainly rated by Moody's and Fitch. Kroll Bond Ratings also separately rates only a handful of slices of the deal backed specifically by a US$310m loan on one property, the Providence Place Mall in Rhode Island.

The Kroll-rated classes of the offering are labeled "PPM"; no other classes issued by DBUBS 2011-LC3 are rated by Kroll. The Providence Place Mall is owned by General Growth Properties.

Prior to the announcement, the deal had already been slashed in size from US$2.2bn to US$1.4bn in previous weeks due to investor pullback from the sector.

The conduit boasts five Triple A classes that offer 30% credit protection the thickest layer of credit support so far for "CMBS 2.0" deals.

Investors had been fighting back against looser underwriting and increased leverage in CMBS transactions this year, and succeeded on July 20 in swaying Goldman Sachs and Citigroup to increase the Triple A credit support from 14.5pc to 20pc for the banks' US$1.5bn GSMS GC4 issue.

However, following S&P's abrupt criteria announcement a week later, the two bank sponsors were forced to pull the priced deal from the market, post-pricing.

Today's DBUBS conduit is one of the first CMBS 2.0 deals to be divided into public, offered certificates, and private, non-offered certificates.

Although Deutsche Bank and UBS are joint book-runners and co-lead managers, the offering is also being co-managed by Ladder Capital Securities, JP Morgan, and Nomura Securities.

The deal is backed by 43 loans for 64 properties, with a weighted average loan-to-value of 58% and an underwritten DSCR of 1.71x.

Nearly 40pc of the collateral is backed by loans on office buildings, which distinguishes the offering from other transactions this year, which were backed mostly by retail properties.

Nineteen percent of the collateral is located in New York. The rest of the properties are in California, Texas, Delaware, and Florida.

Despite the risk-aversion and volatility currently roiling the fixed income markets, investors say that the deal may stand a chance to price efficiently for its sponsors if the loans were appropriately hedged while in warehouse.

"The sponsors won't necessarily take a loss in this environment. There is no way to know what the state of the market is going to be on the day of pricing," said a CMBS investor. "If the swap market is steady and there isn't some unforeseen force affecting the markets, there is no reason to take a loss.

"Everyone is keyed up to what has happened in the last few months with new-issue CMBS. No rushing. No mistakes."

The lead managers began meeting with groups of investors today in New York, Hartford, Boston, Minneapolis, and Chicago. The deal is anticipated to price this week and to settle by August 30.

Despite awarding the transaction a conservative credit enhancement level of 30pc to protect its Triple A slices, Moody's said in a report released last week that this so-called "super-senior" structure, which has only recently re-emerged in CMBS deals, is actually a "credit negative" for the sector.

Moody's analysts say that this structure can diminish so much of the credit risk for senior investors that they "no longer exert discipline on the underwriting process."

"Given signs of credit slippage, more investor participation is encouraged," Tad Philipp, director of commercial real estate research at Moody's.

Copyright Reuters, 2011