North America MBS House: Citigroup

Citigroup led many of the year’s biggest commercial real estate financings for the sector’s largest property owners. It tapped the CMBS market and also used its own balance sheet to win deals when there was no shortage of competition for loans from other banks, thrifts, government-backed lenders and life insurance companies.

There is no bigger name than Blackstone in commercial real estate and it was Citigroup that the property giant picked to lead the debt financing on its US$7.5bn leveraged buyout of Gramercy Property Trust, the largest structured US real estate deal since the global financial crisis.

It was anchored by a US$5.5bn debt package that closed in October, of which US$3bn came from a CMBS loan. Collateral for the CMBS is made up of a large swath of industrial properties that dot the country, with Citigroup providing 60% of the funding and Bank of America Merrill Lynch the rest.

That CMBS portion was split into US$2.5bn of bonds and US$500m of mezzanine loans.

“Coming into this year, we did acknowledge there was going to be a lot less in terms of [refinancing] CMBS maturities,” said David Bouton, co-head of US CMBS and real estate finance at Citigroup.

“We began talking with counterparties about M&A, big transactions, the single-asset/single-borrower business, and thought we had to really pursue that aggressively.”

Another global real estate colossus, Brookfield, selected Citigroup to lead-manage a landmark transaction: this time the US$1.85bn refinancing of its sprawling Atlantis Resort in the Bahamas – and just ahead of the hurricane season.

It isn’t every day that the CMBS market finances a Caribbean mini-city of four seaside hotels, several restaurants, a casino, a water park and a desalination plant. It even mortgaged dolphins.

Pricing on the bonds, totalling US$1.2bn, widened some from initial talk, but they were still priced within expectations. Citigroup also sold another US$650m of mezzanine loans backing the property to three investors.

But beyond the glitziest real estate transactions, Citigroup also kept originating a stream of conduit loans for benchmark CMBS deals.

By mid-November, it had pooled loans into a dozen conduit deals with other top banks, and ranked third in the CMBS league table.

Way back in January, one of Citigroup’s conduit deals hit the post-crisis low of swaps plus 66bp for 10-year Triple A paper.

Later in the year, market volatility pushed spreads on similar bonds to around 90bp. But the rockier backdrop also highlighted one of Citigroup’s strengths – its long-standing presence in the CMBS space, which through its Salomon Brothers heritage can be traced back to the creation of the very first mortgage-backed deals in the 1970s.

For many investors, buying into a series of conduit deals backstopped by Citigroup makes the bonds more attractive from a liquidity perspective.

“As 2008 proved, the securitised markets’ Achilles’ heel is liquidity,” one portfolio manager said. “We prefer predictable conduit issuance and issuers with a lot of deals outstanding already, where multiple dealers are making consistent and predictable markets.”

This year, private-label residential mortgage bond issuance had set a new annual post-crisis record of US$100bn by November.

One of Citigroup’s more notable RMBS transactions was helping Australian mortgage lender Pepper Homes come to the deep well of the US dollar market with its expanded mortgage product.

Citigroup was a joint lead on the US dollar portion of Pepper’s first dual-currency and cross-border transactions from its I-Prime shelf. The programme includes a higher portion of investor loans and loans with interest-only periods than Pepper’s standard prime transactions.