Starz Mortgage Securities 2021-1 DAC, a securitisation that priced in November, was Europe’s first broadly distributed commercial real estate collateralised loan obligation since the financial crisis. It may lead to more European CRE CLO issuance, writes Daniel Cunningham. Credit Suisse arranged the £219.8 million (€261 million) deal, which comprised nine loans originated by mid-market lender Starz Real Estate. The loans were secured by 17 properties in the UK, the Netherlands, Ireland, and Spain. The deal’s AAA-rated sterling notes were priced at a coupon of 125 basis points. The euro-denominated notes that carried the same rating were priced at a coupon of 115bps. Starz’s CEO David Arzi says CLO issuance had been part of its plan since its launch in 2018: “With covid, the capital markets took a break, so as soon as the window for securitisations began to open, we started working on this CRE CLO. It was always in our business plan to originate loans and then securitise them, which is the way an alternative lender would do it in the States.”

Efficient funding solution
CRE CLOs are big business in the US. According to Bloomberg, there was almost $42 billion of issuance in 2021 to 25 November, compared with $9.9 billion for the whole of 2020 and $22.1 billion in 2019. A key difference between commercial mortgage-backed securities and CRE CLOs is that the latter contain shorter-term loans written against transitional properties. Arzi says the fact that fewer alternative lenders have been writing this type of loan in Europe during the current cycle, compared with in the US, explains the lack of European CRE CLO issuance. Another key difference is that, while CMBS transactions are static – loans remain in the structure during its lifespan – CLOs can be static or revolving, with the latter allowing lenders to move loans in and out of the structure. Arzi points out that Starz Mortgage Securities is in fact a static transaction, though its structure as a CRE CLO is important for future transactions: “This deal looks very similar to a CMBS because the pool was static. But the benefit of doing it in this format is that, for the next deal, people are used to seeing that CRE CLO structure. Hopefully there’ll be a couple of other issuers in the market as it develops, so you can build a market that is a benefit to everyone. This deal had nine loans, so even in the CMBS market it would have looked structurally different. But we want to get to the point in later issuances that we have revolving features, so to do that we had to pave the way with this structure, which down the road will afford us some flexibility.” Arzi says the flexibility in CRE CLOs benefits alternative lenders like Starz, in part because it allows the lender to replace loans that have been repaid with new ones. “You can leave some additional capital in the structure to provide for loans which will be originated shortly. So, if you know you’re closing three more deals in the next two months, you can add a ramp period where those deals come into the facility. The benefit of the CRE CLO structure is it perfectly match funds the assets and liabilities, and warehouse financing can have a mismatch in timing where the loans can be longer than the warehouse.” Arzi says CRE CLOs are an efficient funding solution for lenders that use leverage. “Those that had thought they may keep their loans on warehouse forever might start to gravitate towards this market.”