Wireless tower operators Crown Castle and Global Signal went the CMBS route in the US with recapitalisation exercises, and now CMBS investors are being tapped to help finance some large buyouts. The cheaper financing available in the securitisation markets could reduce the overall cost of capital for the sponsors, allowing them to bid more aggressively for assets.
The European structured finance market is at least five years behind, but the Land Securities recapitalisation illustrates that there is potential for development that would reduce the cost of financing in some scenarios.
The £3.24bn refinancing was achieved last year, when existing unsecured debt investors came out firmly in favour of what was, at the time, a new structural concept. S&P categorised the deal as a special case CMBS, while Fitch called it a structured corporate financing, which “could end up looking like a securitisation in the latter stages of covenant tightening”.
In the US market, CMBS is currently being applied in buyout deals. Bain Capital Partners, KKR and Vornado Realty Trust are structuring a CMBS transaction to help finance their massive US$6.6bn LBO of retailer Toys R Us, and Blackstone is taking a similar approach in its US$3.24bn purchase of Wyndham Hotels. There are also rumblings that Texas Pacific and Warburg Pincus could follow a similar path to help fund their US$5.1bn LBO of upscale retailer Neiman Marcus.
In these cases, the CMBS market would probably supplement leveraged loan and high-yield bond packages. Securitisation would allow the sponsors to use their targets’ vast real estate holdings as collateral to access this cheaper money, though such a strategy is employable in only a limited number of cases.
Last year, Cerberus Capital Management and Sun Capital Partners sold CMBS to help finance their purchase of the Mervyn’s department store chain from Target. It is believed to be one of the first times that significant CMBS financing was used to back an LBO.
Selling CMBS is a particularly welcome alternative at this point relative to the US high-yield bond market, which is unsteady and might struggle to absorb an extremely large deal. In contrast, CMBS technicals are very favourable for issuers, with spreads tightening and appetite for new deals robust. A banker familiar with the deal said Toys R Us was working on a circa US$850m CMBS offering backed by the retailer’s real estate assets.
Banc of America and Deutsche Bank are expected to lead the transaction. “Toys would be overcapitalised in the bank market if it had tapped for the full amount,” said one banker away from the deal. “It simply didn’t want to push capacity; besides, they can finance in the CMBS market and get a cheaper deal.”
The precise nature of the Toys R Us financing package is still to be determined, but one piece will be a US$2bn asset-based loan that Banc of America and Deutsche Bank launched last week at 175bp over Libor.
While Land Securities’ project was an evolutionary step for the debt capital markets in Europe, the transaction was offered
only to existing investors; the challenge of recruiting new investors to a similar structured corporate financing replete with common terms agreement and tiered covenant package has yet to be faced.
“There are no new investors in this transaction,” said one observer. “Existing bondholders are very familiar with Land Securities, its assets, its management and its business plan. It would have been very time-consuming to explain a new company and a new structure like this.”