London's Gatehouse structures CMBS-like Islamic securitization

London-based Gatehouse Bank has structured a 100 million euro Islamic loan facility backed by direct legal ownership of property, a novel type of securitization which in some ways resembles commercial mortgage-backed securities (CMBS).

Conventional CMBS were hit hard by the U.S. sub-prime mortgage crisis seven years ago and were seen by some bankers as a source of the crisis as mortgages became non-performing.

The Islamic version developed by Gatehouse, one of Britain's six full-fledged Islamic banks, may be less unstable because, although it is based on income from commercial property, it includes actual ownership of the underlying property.

Gatehouse structured and arranged the five-year deal to fund its acquisition of property in the Paris region.

Securitization in Islamic finance is still in its infancy. Regulators in Malaysia introduced guidelines on asset-backed securities (ABS) in 2001, revised in 2004, which also cover sharia-compliant ABS.

In 2013, Munich-based FWU Group issued a $20 million Islamic bond backed by insurance policies, the first tranche of a $100 million programme arranged by EIIB-Rasmala, a venture between London-based European Islamic Investment Bank and Dubai's Rasmala Group.

Gatehouse Bank issued a 6.9 million pound ($10.4 million) covered Islamic bond backed by a property in Basingstoke in 2012.

Understanding the Swiss Franc Currency Shock

I dedicate this blog primarily to real estate headlines and news. But on occasion there are non-real estate issues in the global financial system that deserve exposure, and the Swiss Franc Currency Shock is one of them. If you don't fully understand the issue, you're reading the right blog.

The currency shock happened when the Swiss National Bank (or SNB, similar to our Federal Reserve) announced that they would lift the "cap" on the Swiss franc's value.

Why did the SNB create a "cap"?

When countries in the Eurozone (countries that use the Euro) began to have problems (think Greece, Spain, Portugal and Ireland), firms began trading their Euros for Swiss francs (the Swiss have a long-held reputation for having a strong financial system). However, Switzerland is an exporter. They sell goods and services primarily to other European countries. When the Swiss franc increased in demand and the Euro fell in demand, the Swiss franc became more expensive, and it became harder for Swiss firms to sell their goods and services to other European countries. The SNB created a cap in 2011 to protect their exporting firms.

How did the SNB create a "cap"?

A country can peg its currency to another currency by buying and holding large sums of a particular currency. SNB did just that: bought and held various, depreciating European currencies like the Euro. Makes sense, right? If you bought and held a large stake in a foreign currency, your net worth would be tied to that currency. This is not entirely uncommon, and is the same mechanism Tim Geithner accused China of using when he said China is "manipulating its currency". If you don't remember, click here.

Ultimately, this cap means that as the value of the Euro decreased, so did the value of the Swiss franc.

Why did the SNB lift the "cap"?

In a way, the US and the Eurozone have been dealing with the same global recession, but in two different ways. In Europe, nations have imposed "austerity" measures. This is particularly evident in Greece, where the Eurozone has been requiring the country to impose higher taxes and cut spending. In the US, the Federal Reserve has taken to several rounds of "quantitative easing." The Federal Reserve has spent billions nearly every month on bonds in recent years to prop up the financial system. (The Fed spends money on financial firms' assets. Financial firms can sell their assets for more money. This means that financial companies have more cash. If competing financial firms have excess cash, they can't charge borrowers as much to lend that money, and interest rates go down. Ultimately, it's cheaper for borrowers to make investments.)

The American method appears to be attractive to the Eurozone. But another thing happens when you have excess cash in your financial system; the value of your cash depreciates. 

It looks like the Swiss National Bank is afraid of quantitative easing in the Eurozone. If quantitative easing proceeds, AND the SNB is committed to pegging the exchange rate, the easing would further depreciate the Swiss franc. While this may sound like good news because the Swiss watch you've been eyeing is getting cheaper and cheaper, this may not be so good for the Swiss. In real terms, letting the currency become worth less and less, means that the country is becoming increasingly disenfranchised. Get it? The value of the country's holdings (i.e. money, assets, everything denominated in Swiss francs) become worth less and less. This is why they removed the cap.

How did the SNB lift the "cap"?

They will stop their practice of buying and holding weaker currencies.

S&P Barred from Rating Conduits: One Year

For years now, there has been talk of S&P lowering their rating standards. If you've forgotten, after the housing bust, there was a decent amount finger pointing in the direction of the rating agencies, with particular focus on S&P.

Because the rating agencies are hired and paid by bond issuers, the agencies have an incentive to give better ratings than their competitors. Because of S&Ps misconduct, they are barred from rating CMBS conduit deals.

Its single-borrower business and existing ratings won’t be affected. The regulator late last year was negotiating terms of a settlement over alleged violations of federal securities laws when it rated six CMBS deals that were issued in 2011. The worry at the time was that the SEC would suspend S&P from rating all CMBS business. But that’s considered unlikely. As it is, S&P hasn’t rated a new-issue CMBS conduit transaction since last June.

Cantor Lends $270 Million Against NYC’s 26 Broadway

Cantor Commercial Real Estate Lending has provided $270 million of senior and mezzanine financing against 26 Broadway, a 900,000-square-foot office property in Manhattan’s Financial District.

 

The seven-year financing includes a senior loan, with a balance of $220 million, that is expected to be securitized.

 

The 32-story property, also known as the Standard Oil Building, is owned by the Chetrit Group, which in 2007 acquired it, along with three of the four land parcels on which it sits, from the Koeppel family for $225 million. Five years ago, it paid $35 million for the last land parcel.

 

The property previously was encumbered by a $183.5 million loan that Wells Fargo Bank acquired last year from a collateralized debt obligation that was managed by what’s now Gramercy Property Trust.

 

The 26 Broadway building is 90 percent occupied, which is up from 76 percent last year, thanks to some 126,000 sf of new leases that were signed in recent months. Those include a 45,000 sf agreement with the New York Film Academy, which will occupy its space through 2029, and 20,000 sf agreements with graphic-design company Ustwo Studio Inc. and law firm Schlam Stone & Dolan.

Its largest tenant is the New York City Department of Education, in 181,659 sf through January 2039 on behalf of the Lower Manhattan Community Middle School.

 

New York City has designated the 26 Broadway building as a landmark. It was constructed in 1928 by Standard Oil Co., which used it as its headquarters until 1956, when it moved to 150 East 42nd St.

The building includes 3,500 sf of retail space.

KKR puts weight behind non-bank CMBS lending

Non-bank lenders are expected to be a bigger force in the US CMBS lending market in the coming year, particularly as deep-pocketed firms like KKR & Co LP elbow their way into the sector.

The buyout firm has hired industry veteran Matt Salem and several members of his team from Rialto Capital Management, a person familiar with the matter said on Thursday.

It marks KKR’s first foray into real estate debt since it created its property-focused group in 2011.

Rialto has been a consistent presence in CMBS deals as a lender as well as a B-piece buyer over the past three years, and it was one of only a handful of specialty debt shops to ramp up in both areas in the wake of the financial crisis.

At KKR, the team will focus on investments in preferred equity, mezzanine debt and junior credit like B-pieces, in addition to CMBS lending, the person said.

The news was the talk of the second day of the annual Commercial Real Estate Finance Council conference in Miami.

“Non-bank lenders are each saying they are going to increase loan production by 50% this year,” a portfolio manager who buys CMBS told IFR on the sidelines of the conference.

“We want to know how long they will be around after the loan is made.”

Though KKR’s move is not expected to dethrone the dominant players in the CMBS market, it does represent an important shift.

Bond deals flowing from bank-sponsored shelves are likely to look more complicated as the list of lenders spinning loans into bonds expands, the portfolio manager said.

Another non-bank ramping up its CMBS lending effort is Benefit Street Partners (BSB), the credit strategy arm of Providence Equity Partners, a global private equity firm with US$40bn in capital under management.

Scott Wayneburn, a former Deutsche Bank staffer, heads BSB’s 11 member commercial real estate team.