Deutsche Bank to sell £210m CMBS on Westfield’s Merry Hill

By James Wallace - Thursday, December 08, 2011 15:20

Deutsche Bank will bring a £210m single loan commercial mortgage-backed securitisation (CMBS) to the market in January, secured by the £1bn Westfield Merry Hill shopping centre on the outskirts of Dudley.

The loan is secured against the 50% stake held by Queensland Investment Corporation, the Australian government-backed global fund manager, which Westfield sold to for £524m in February 2007. Assuming a circa £1bn valuation, the £210m loan against a 50% stake suggests the LTV would be around 42%.

The CMBS transaction is currently being reviewed by Standard & Poor’s, Fitch Ratings and DBRS who are all in dialogue with Deutsche to determine tranching, after which an investor roadshow will be launched.

The sale will be run by director Fiona D'Silva, who joined from Goldman Sachs over the summer, and director Bhavesh Patel, who replaced Heath Forusz after he left the bank in August.

Deutsche’s loan is secured by first ranking shares in a UK property finance company set up by QIC, called QIC Finance, rather than a direct mortgage against the shopping centre. As such, in the event of default, the loan does not have the power of sale over the property.

The market has turned considerably since Deutsche got its £302m Chiswick Park CMBS away on 11 June, for which AAA bonds closed at 175 bps over LIBOR. By the end of last month, the AAA Chiswick Park bonds were trading at 375bps in the secondary market, illustrating the extent to which the market has moved in less than six months.

All of which suggests the AAA bond spreads in the Merry Hill securitisation could be as wide as 300 bps over LIBOR, experts predict.

Deutsche’s loan is secured by first ranking shares in a UK property finance company set up by QIC, called QIC Finance, rather than a direct mortgage against the shopping centre. As such, in the event of default, the loan does not have the power of sale over the property.

In Fitch Rating’s pre-sale report for DECO 12 back in March 2007, the rating agency said: “In case of loan default, there would be no power of sale; instead the Westfield partners would have the right to buy the QIC partnership interest. The complexity of the enforcement process and the requirement to enter into the partnership agreement is likely to limit the number of potential acquirers of the property in a default scenario and may therefore affect recovery proceeds.”

However, the low leverage mitigates the threat of an LTV breach, sources familiar with the deal suggest.

Fitch wrote in 2007 that one of the key advantages of the Merry Hill loan is the granularity of its tenant base, the quality retail space and the limited availability of this type of asset in the market.

The £210m loan to QIC, Australia’s government-owned fund manager, was refinanced over the summer after it was extracted from Deutsche Bank’s £672.9m DECO 12 CMBS, thought to be priced at a margin of around 250bps over LIBOR.

Deutsche Bank had originally earmarked the loan as part of a three-loan CMBS, along with the £145m loan secured by MEPC’s Milton Park, the Oxfordshire business park, and a loan secured by Marcol Group's Design Centre in Chelsea Harbour. However, the exacerbation of the eurozone debt crisis in the summer deteriorated sentiment prompting the bank to shelve the ambitious plans.    

D'Silva and Patel were understood to have explored both a syndication and single loan CMBS, but interest in the former route proved to be restricted by the nature of the Merry Hill loan’s structure.

Merry Hill consists of a 220-acre mixed-use complex, including the 1.5m sq ft shopping centre, with more than 250 stores and anchored by Debenhams, Marks & Spencer, Sainsbury’s and Asda, as well as the nearby Waterfront which consists of offices, restaurants and bars. Merry Hill is 10 miles west of Birmingham and five miles south of Dudley.

Deutsche Bank declined to comment.

jwallace@costar.co.uk

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