20 March 2006
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7 February 2013
The explosive growth in structured credit in the past few years has brought some interesting and innovative deals to Ireland, initially as a jurisdiction of domicile and more recently as a jurisdiction of origination. Eurohypo's ground-breaking Opera Finance debt issue for Real Estate Opportunities (REO) (part of Irish property company Treasury Holdings), which closed in mid-February, is the high-water mark so far.
The amendments to Ireland's securitisation regime in 2003 brought its ambit up to date with what most participants regarded as the 'desired' market position, providing for highly effective profit extraction through 'total-return' and 'interest-only' notes, widening the range of available structures and allowing for straight lending by issuers to borrowers, as opposed to the two-tier separate origination and asset purchase within the preceding regime.
These improvements quickly yielded results, particularly in the collateralised debt obligations (CDO) market, where Ireland, building on its existing reputation, became the number one domicile of choice for CDO transactions in 2004.
The opening up of the Irish regime could not have come at a better time. It coincided with the beginning of major market developments in European commercial mortgage-backed securitisation (CMBS), particularly in Germany and France. Arrangers and originators have been quick to capitalise on the benefits of Ireland as a domicile for these deals on a cross-border basis, with Ireland's broad double-taxation treaty network facilitating payments with minimal withholding tax concerns. On the structuring side, the flexibility of the Irish regime has allowed for returns to be engineered on an effective 'made to order' basis, capturing the evolution and importation of the 'A/B loan structure', 'structured mezzanine debt' and various other capital techniques, many of which had originated in the more mature US CMBS market.
Deutsche Bank was one of the first to recognise the structuring potential of the Irish market. Deco Series 2003-CIT was the first European CMBS to use an A/B loan structure, splitting the participation in the underlying loan, with only the senior tranche being securitised. This type of structure is particularly useful in enhancing the securitisable value of a highly leveraged loan. From the Irish perspective, the deal was significant as it was arguably the first to utilise what has become known as the 'class-X note' structure. By purchasing the total-return class-X note, the originator is able to efficiently extract the residual profit from the structure as an interest payment while retaining the flexibility that a bearer instrument offers to divest itself of its retained profit interest should it so desire.
Credit Suisse was also quick to recognise the potential offered by the Irish market, establishing its Titan Europe CMBS conduit in Ireland at the end of 2004. Titan Europe 2004-1 was the first European CMBS deal to replicate a US-style capital structure. The deal was also the first Irish deal to introduce the so-called 'class-Y note' feature. The class-Y note is a 'total-return' note where the return is usually derived from the performance of specific non-core revenue streams, such as interest earned on permitted investments, the upside on swap payments, or combinations of these. This deal was swiftly followed by Titan Europe 2004-2, the second pan-European CMBS (German and French loans). This second deal represented a remarkable progression on the first, resolving many of the structural complexities in favour of a much flatter structure, making it instantly more attractive to investors.
Titan 2004-2 also introduced a new structural mezzanine element to the capital arrangements. A variation on the A/B loan structure, the security package is split, with the 'senior' security only entering the securitisation pool. The un-securitised structured mezzanine loan is secured over the mezzanine borrower's equity interest in the mortgage loan borrower.
The following year saw no let up in pace, with European CMBS issuance rising in volume from E15.8bn (£10.88bn) in 2004 to E36.7bn (£25.26) that year. GMAC had, several years earlier, established its European mortgage servicing hub in Ireland (GMAC Commercial Mortgage Servicing). 2005 saw its parent, GMAC Commercial Mortgage Bank Europe, enter the CMBS market with the first of a series of partnered deals, beginning with February's Taurus CMBS issue with Merrill Lynch and followed by a series of partnered deals with the Credit Suisse through the establishment of the Cornerstone Titan conduit. These deals saw further fine turning of the return to reflect the co-pooling of the assets. Again, the flexibility of the Irish securitisation regime allowed this to be done with minimal structuring. Other conduits to establish and/or issue through Ireland in 2005 included the JPMorgan/Bear Stearns co-partnered Ursus, Goldman Sachs' Fleet Street One Finance and further issuance under Deutsche Bank's Deco Series.
One missing element from the equation from an Irish perspective, however, was a true domestic-asset Irish CMBS. Although 2005 arguably established Ireland as the jurisdiction of choice for locating CMBS transactions on a cross-border basis (the Cornerstone deals had involved UK loans), certain Irish insolvency and tax issues had seen a number of attempts at more advanced domestic structures that involved 'whole business' elements going back to the drawing board. Although Ireland had been used as a platform for non-domestic whole-business securitisation transactions, difficulties with applying these structuring techniques in Ireland had created an effective bottleneck on the innovations that they allowed, CMBS deals among them. To put the bottleneck in context, Ireland's first public domestic retail mortgaged backed securities had taken place in 1998 (with the Celtic 1 issue for First Active, now part of the RBS Group). The quantum leap to whole-business structuring was being stymied by these structural hurdles.
Eurohypo's Opera Finance (CMH) issue in February of this year overcame many of these and may represent a point of new departure for Irish securitisation. The transaction took the form of a W375m (£258.1m) seven-year senior loan to subsidiaries of REO. The loan was secured on 14 different properties, all of which were transferred into new on-balance sheet property-owning special-purpose companies within the group. A domestic asset CMBS transaction, the deal represents Ireland's first whole-business securitisation, as effective 'off-balance sheet' pricing was achieved with an 'on-balance sheet' structure. The historical hurdles that were overcome on this deal should allow for some interesting deals in the future.
This week alone has already seen the launch of another Deco Series issue, the largest of its kind in European markets to date, while Credit Suisse has launched its latest, and largest, Titan Europe offering. The CMBS wave shows no signs of abating and Ireland seems well positioned on its crest.
Hugh Beattie is a structured finance partner at McCann FitzGerald London