Exclusive: Europe copies US as first collateralised loan obligation is raised in £219m UK deal
The first commercial real estate collateralised loan obligation in Europe’s history was completed on Friday in a deal worth £219m.
Backed by a portfolio of nine commercial mortgage loans originated by Starz Mortgage Capital, the deal was concluded with international law firm Reed Smith acting as advisors.
“We really could be seeing the birth of the next big thing”, Iain Balkwill, partner in international law firm Reed Smith’s London office, told CityAM this weekend.
“With such arrangements taking US markets by storm, it really was only a matter of time before they arrived in Europe. We could well see a wave of similar deals in the months ahead”, Balkwill added.
Though new to Europe, such deals have grown in popularity in US markets in recent years, where year-to-date issuance stands at over £41bn, according to data compiled by Bloomberg.
Market commentators and those involved in the deal predict a flurry of similar transactions as Europe looks to copy the US despite some concerns over the risk profile.
Complex bundling
Though the complex bundling together of loans increases potential profits for investors, similar arrangements have been criticised in the wake of the global financial crisis for heightening risk and possible losses.
Following an apparent rise in low-quality arrangements, one US commentator has written that ‘would-be CLO equity investors should be exceedingly cautious’.
Balkwill, however, claims that measures in place to protect such arrangements have significantly improved since the 2008 crash.
“The lessons have been learned from the financial crash, which ultimately involved a different asset class”, he said.
“When it comes to CLOs, we have things like note protection tests which are beneficial for investors as they mean if there is any distress then funds are cut off from equity.”
Wharton Finance professors Michael R. Roberts and Michael Schwert, meanwhile, have argued that some of the reported concerns of the dangers of CLOs ‘are misplaced, driven by a misunderstanding of their role in the banking system.’