Centro prices first CMBS deal

Aussie property trust taps debt capital markets for first time with A$200 million issue.

Centro Properties Group, the listed property trust with interests in 27 retail properties located throughout Australia, has made its debut in the debt capital markets with a A$200 million ($112.2 million) commercial mortgage-backed securitization (CMBS). ANZ Investment Bank and Commonwealth Bank acted as joint lead manager on the transaction.

The bonds, issued out of the Centro Capital Property Ltd. special purpose vehicle, are collateralized by a secured loan between the issuer and CPT Manager, a responsible entity of Centro, over a portfolio of seven investment grade shopping centres. Cash flows generated from the properties - located in New South Wales, Victoria, Queensland and Western Australia - will be used to pay back the loan, and ultimately the bond investors.

The market valuation loan-to-values for the A$180.3 million of triple-A rated A-class notes and A$19.7 million of AA-rated class B notes are 35.9% and 40.4% respectively, compared to Standard & Poor's assessment of 40% and 45%. 

While the market valuation of the debt service coverage ratios on the A notes is 3.61 times (x) and 3.21x for the B notes, S&P offers the more conservative figures of 2.28x and 2.05x.

Currently, there is a combined occupancy rate of close to 99% on the properties, which have so far generated an average annual income of A$42.3 million. S&P assesses that the pool has a capital value of A$450.7 million compared to the market valuation of A$501.2 million. 

Pick-up for the triple-A floating rate bonds is 53bp over the three month Bank Bill Swap Reference Rate (BBSW), while the AA-rated fixed-rate tranche offers a nominal coupon of 6.25%, currently 75bp plus BBSW. Both tranches priced at par.

If the bonds are not redeemed on the scheduled maturity date in December 2007, there will be a step-up to 106 over one month BBSW for the A-tranche and 150bp over for the B notes until the final maturity date of June 2009.

With spreads having moved out substantially in recent months in Australia, one banker familiar with the transaction said the pricing was reflective of the current environment. "I think the pricing was at levels anticipated given market conditions," he says. "The current environment has seen levels widen by several points from similar deals issued earlier in the year. Recently there have been deals that were launched, only to be pulled shortly afterwards. In such an environment, the Centro deal was well received by investors and successfully placed."

Andrew Scott, chief executive officer for Centro, believes that it was important for the company to get the deal in the market, despite the adverse move in spreads. "We wanted to do this deal as a means to diversify our funding sources, and securitization will form an important part of a long-term strategy," he says. "Although spreads have gone out, the pricing was still within the target set for the first deal. While recognising that the market has changed, the intention for Centro is to build a yield curve. So when we issue future deals, we will see spreads coming in from where they are now."

Bankers say that the deal placed with 12 accounts, with interest coming from a broad class of investors ranging from asset managers to repackaging conduits.

Meanwhile, sources familiar with the debut A$112 million CMBS by Tyndall Meridan Trust expect to price the deal on Thursday. Westpac is acting as sole lead manager on the transaction.

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