Credit Suisse brings real estate CLOs popular in US to Europe

Credit Suisse Group AG completed Europe’s first commercial real estate collateralised loan obligation, according to lawyers involved in the deal, breaking into a market that’s more than doubled in the US.
The bank on Friday sealed a deal with commercial real estate lender Starz Real Estate, according lawyers at Reed Smith who represent the borrower. The agreement, denominated in euros and pounds, is worth the equivalent of £220mn ($297mn). A spokeswoman for Credit Suisse confirmed the deal had settled.
The complex securities bundle commercial real estate loans into bonds and initially fell out of favour following the 2008 financial crisis. In recent years, they’ve staged a comeback in the US, where year-to-date issuance stands at $41.3bn, up from the previous record of $19bn set in 2019, according to data compiled by Bloomberg.
There’s now speculation that there could be a similar surge in Europe.
“This has all the hallmarks of being the next big thing,” Reed Smith partner Iain Balkwill said in an interview. “The market has had a challenging decade but this is a clear indicator that this kind of securitisation technology is here to stay.”
Deal clamour: Investors have clamoured to buy the securities because they offer higher yields than other forms of debt and stand to benefit from a recovering economy.
The securities are backed by properties being upgraded or repurposed, such as malls being turned into apartments, a scenario that has grown more common as the pandemic has changed many aspects of daily life. Because the real estate is in a transitional period, the loans aren’t eligible for inclusion in traditional commercial mortgage-backed securities.
The deal reflects high demand for illiquid investments across dent and equity markets, and the difficulty that investors face with tight investment grade-spreads, said John Roe, head of multi-asset funds at Legal & General. “It seems likely we’ll see more in both real estate debt and more broadly in liquidity transformation,” he said.  
The Credit Suisse transaction includes residential properties in London and hotels elsewhere in the UK. The deal also includes loans backing properties in Spain, Ireland and the Netherlands.
Riskier collateral: CRE CLOs were known as CRE collateralised debt obligations in the lead-up to the financial crisis, but were rebranded in the aftermath. Crisis-era deals performed poorly because they were able to hold riskier collateral, and issuers often didn’t have a stake in the transaction.
Reed Smith’s Balkwill said the structures protecting the securities ihave improved. “You’ve got note protection tests that mean that if there’s any distress, then funds are cut off from the equity,” he said. “You have a product that’s very much fit for purpose and primed for growth.”
Europe’s debut CRE CLO comes as investors have been clamouring to buy CMBS and traditional CLOs. CMBS sales are the highest since 2013, according to Rabobank data, and CLOs backed by risky corporate loans have seen record sales in both the US and Europe. The global CLO market surpassed $1tn of debt outstanding, according to JPMorgan Chase & Co.