Credit Suisse funds CLOs in a bet on Wobbly Real Estate in the UK

(Bloomberg) – Credit Suisse Group AG is funding a foray into a niche in the debt markets used to finance property at a time when UK property is under pressure from rising interest rates.

The Swiss lender will provide Aeon Investments Ltd with up to £900 million ($1.02 billion) to help consolidate the loans and issue secured bonds against them, known as collateralized loan bonds. commercial real estate, Aeon co-founders Oumar Diallo and Ben Churchill said in an interview.

The combined transactions, financed by Credit Suisse’s three-year revolving line of credit, will be the largest of their kind seen in Europe to date. A Credit Suisse spokesperson declined to comment when contacted by Bloomberg.

UK property, like other property markets in the developed world, is in flux as a decade-long bull market, fueled by rock-bottom interest rates, reverses amid recession fears . Stocks and bonds of property companies have sold off strongly this year as investors weigh the impact of an economic slowdown triggered by rising borrowing costs and an energy supply crisis.

Some investors cherish the better yields and protection against rising interest rates offered by floating rate securities, while others warn of the higher risk of default as economic conditions deteriorate.

For its part, Aeon says it is counting on strong demand for newer office space with the best environmental credentials as UK businesses assess their workspace needs in the wake of the pandemic.

The batch of three CRE CLOs that the company plans to issue from 2023 will finance medium-sized projects across England and Wales, including offices, industrial units, warehouses and also properties commercial buildings, as well as buildings in need of upgrading, according to Diallo and Churchill.

Right moment

“For all of these pockets of value, we thought it was an opportune time where we could capture a premium on the revenue side, without increasing risk if loan selection and underwriting were careful,” Diallo said.

That’s thanks to their shorter duration and limited drawdowns, according to The Duy Nguyen, Senior Portfolio Manager, Head of Secure Funding Strategies, AXA Investment Managers.

While credit market yields have fallen across the board this year, European investment-grade bonds for asset-backed securities are down around 1.6% for the period, according to data compiled by Bloomberg. . In contrast, investment-grade corporate bonds plunged more than 12%, according to a Bank of America Corp index.

As European real estate is squeezed, the CRE CLO structure offers more flexibility than commercial mortgage-backed securities, a more traditional financing tool, said Iain Balkwill, partner at law firm Reed Smith LLP, which has worked on Europe’s first CRE CLO last year.

While a CRE CLO aggregates a bunch of loans, a CMBS can have as little as one large mortgage backing a deal. The securities structure also gives managers more control because they can make capital injections and swap loans in response to market conditions.

For example, “a CRE CLO is unlikely to have 100% hotel exposure,” said Pranava Boyidapu, European mortgage analyst at Barclays Plc.

While CRE CLOs are still rare in Europe, their use is growing in the United States, where around $45 billion worth of securities were issued last year, according to Bloomberg data.

This is more than five times the total seen in 2020, hit by the pandemic. By contrast, Europe has so far seen only one such deal – a Starz Real Estate deal late last year worth £220m (£254m). dollars), which was organized by Credit Suisse.

Economic shock

U.S. investors have been reassured by how CRE CLOs have weathered the economic shock of the pandemic with delinquency rates rising far less than for CMBS in 2020, said Anuj Jain, strategist at Barclays Capital Inc. in New York. Delinquencies for CRE CLOs peaked at 3.1% in 2020, compared to a level around three times higher for CMBS, according to Barclays Research.

“They realized these managers had experience navigating this environment,” he said.

A challenge facing the market in Europe is the relative scarcity of CRE loans that could underpin new products and provide them with greater liquidity, Boyidapu said.

“More CRE CLOs would improve this and the two markets would grow together,” she said.

Aeon will work with lending platform WayPark Capital, private bank Arbuthnot Latham & Co Ltd. and specialist SME finance platform Assetz SME Capital Ltd to manually originate and underwrite new loans, while looking for opportunities to buy back credits on the secondary market.

“We are actively pursuing a number of opportunities where performing portfolios are offered by banks and originators looking to either exit commercial real estate lending or de-risk their books,” said Aeon’s Churchill. .

(A previous version incorrectly quoted the Aeon CLO funding amount in euros rather than sterling in paragraph 2.)

(Adds comment from The Duy Nguyen)

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