The Leda Group, the privately owned Australian property developer, yesterday priced the country's first refinancing of a commercial mortgage backed securitization (CMBS). Fittingly, the deal that is being refinanced - a A$215.2 million ($120.8 million) issue launched in December 1999 and due to mature on December 3 - was one of the first CMBS deals to hit the Aussie market, and the first by a private company rather than a listed property trust.
ANZ Investment Bank, which put together the first deal, continued in its role of lead manager on the second issue.
Leda is securitizing incomes generated by two retail properties: the Tuggeranong Hypodome in Canberra and the Morayfield Shopping Centre in Brisbane. An independent assessment now values the two properties at $416 million, compared to $387 million when the first deal was launched. In the same period, S&P has increased its assessed value of the portfolio to A$364 million from A$318 million.
According to S&P, the underlying assets have shown strong performance since 1999. Net passing income on a consolidated basis has increased from A$26.3 million per annum in 1999 to the current level of A$31.4 million. The rental leases that collateralize the deal have average lives of 8.7 years, and there is a conservative 56% debt service coverage for the bonds.
The three-year transaction - issued out of the Leda Asset Securitization special purpose vehicle - is split into four tranches. Aside from the A$133.68 million triple-A rated senior tranche (A$117.95 million for the original deal), the three subordinated tranches benefit from upgrades by S&P since the original deal. The A$21.68 million of class B notes are now rated AA, up from AA- for the A$42 million notes originally. Additionally, the A$32.52 million C tranche (originally sized A$40.15 million) has seen its rating go up to A from BBB, while the A$15 million D notes (A$14.5 million in the first deal) have been upgraded to BBB from BBB-.
Pricing on the triple-A notes is 45bp over the Bank Bill Swap Reference Rate (BBSW), three points wider than it was in 1999. Despite the strong performance of the underlying pool, the pricing was more a consequence of the outward movement of spreads in the last few months.
"The pricing on the triple-A notes was a function of where the market is right now," comments a banker familiar with the deal. "If you look around, the minimum price talk for the deal by Deutsche Industrial Trust has been 45bp over BBSW. The Leda deal was cleared at this level so is representative of market pricing."
The effort to bring to market the $236 million triple-A offering by Deutsche Industrial Trust - the listed property trust - offers a good example of how tough the markets have been recently.
DIT originally tried to issue a $200 million five-year transaction via Deutsche Bank in August, with target pricing of between 40-44bp over BBSW. Unfavourable investor sentiment led to the deal being held back. Now, three months later, DIT hopes to close the deal - now three years rather than five, with pricing just outside its initial target.
Meanwhile, spreads have come in for the three subordinated tranches on the Leda transaction. The B notes priced at 65bp over BBSW compared to 75bp in 1999, while the C notes have tightened from 108bp three years ago to 95bp now. The D notes - on which pricing was undisclosed in 1999 - offer a pick up of 150bp over BBSW.
"The tighter pricing on the subordinated tranches reflects the upgrades in the ratings and the level of demand," the banker says. "They still offer good yields, especially considering the comfort investors have with a performing deal. There is conservative gearing at the lower rated tranches - even the BBB tranche has only 49% gearing against market valuations - and strong debt service coverage."
The deal was fully subscribed at launch and placed into 11 accounts, all fund managers with no conduits. Four new buyers joined the seven investors who bought into the first deal.
The banker believes that the Leda refinancing marks something of a turning point for the CMBS asset class in Australia. "S&P cite refinancing risk as the key risk on every CMBS presale report," the banker says. "Seeing the first CMBS roll successfully will give investors comfort in this regard."