The primary market remains fairly busy, with two auto ABS and two UK RMBS deals in the pipeline. The most notable addition of the week with MODA 2014, an Italian CMBS. July has started quietly for CLOs, after a rather hectic end of June.
CMBS

Goldman Sachs’ latest Italian CMBS, the EUR 198m MODA 2014, follows close on the heels of Deutsche Bank's DECO 2014 Gondola. It had been rumoured for at least a couple of months. "Goldman Sachs is most likely capitalising on the strong demand for Italian bonds, which is itself the consequence of ECB intervention, greatly improved economic situation in Italy, the Renzi effect, and returned liquidity in the real estate market," said Francesca Galante, from real estate debt structuring and advisory boutique First Growth.

MODA 2014 is backed by two loans granted to Blackstone. The EUR 78m Franciacorta loan is secured on an outlet shopping village in Brescia, Italy. The property contains 152 retail units as well as restaurants. The EUR 120m Vanguard loan is secured on an outlet shopping village near Arezzo (Valdichiana) and three shopping centres in Civitavecchia (Lazio).

Complex paydown structure: The main weakness of the MODA 2014 deal is the complexity of the paydown structure, according to an investor, who thinks that CMBS 2.0 structures should be simple and straightforward. There are two separate waterfalls prior to the expected maturity interest and principal payments: interest is applied pro rata, while all principal proceeds will be applied in accordance with principal allocation buckets. Then following a sequential payment trigger, all principal proceeds would be applied on a fully sequential basis among the notes.

According to Fitch, the non-fully sequential paydown allows some non-senior notes to share in amortisation arising from prepayments and reduces the prospects of senior class deleveraging. Market sources noted that this structure is still more favourable to Class A noteholders than the pro rata payment structures that featured in recent German multi-family or in Gallerie 2013 Srl. "This structure optimises the cost of funding to the benefit of the Class X," one source said.

High margin loans: The other aspect that surprised some market participants is the relatively small size of the transaction. However, the loans – notably the Franciacorta loan - pay a relatively high margin, a market source said. The Franciacorta loan pays E+450bps while the Vanguard loan has a margin of E+390bps, reflecting the typical 2013 vintage margin for the former and the fact that the latter was extended in the past few months and the margin has dropped markedly.

"When the financing of the Franciacorta factory outlet centre was put together, there was very limited financing available, and Goldman Sachs was ready to provide a loan. There is huge liquidity right now in the market and this looks like an ideal time to get the loan off its books," noted Mrs Galante.
The margin on the Vanguard loan could drop to +365bps if the merger of Valdichiana Propco Srl with Valdichiana Retail Srl is completed in the next six months. Until then a piece of the loan is unsecured.

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