London, June 18 - British retailer Tesco has applied its "every little helps" advertising mantra to its borrowing, with a 431 million pound ($707 million) foray into the commercial mortgage-backed security (CMBS) market.
But although it has ended an almost two-year drought in CMBS issuance, Tesco is likely to remain the only brand on offer for some time to come.Tesco's borrowing has the same safe but rather unexciting look and smell of the retailer's own-brand "value" products -- a formula competitors have long sought to replicate. In fact, it is about as plain vanilla as an asset-backed securitisation can get.
The retailer's single-tranche, fixed-rate bond securitises the rental income from 12 of Tesco's UK stores and two of its distribution warehouses. Tesco guarantees all the rental payments -- so unsurprisingly credit ratings agency S&P has given the bonds the same A- rating as Tesco itself.
This not only looks good for Tesco, but also for pension funds and insurance companies looking to pick up the spread of 330 basis points over gilts which the 30-year deal offers.
But anyone hoping for a swift resurgence of the CMBS market on the back of the Tesco deal is likely to be disappointed. There are few issuers in the current economic climate able to match Tesco's solidity and performance . Not only does the group take almost one in every three pounds spent in a British supermarket, but it is also increasing its sales and beginning to claw back losses in market share from rivals including Wal-Mart's Asda, J Sainsbury and Wm Morrison.
With the commercial property market still in the doldrums and no further CMBS issuance on the immediate horizon, it's no surprise that the Tesco issue was heavily oversubscribed. Others may be tempted to follow its lead, but they shouldn't bank on the same enthusiastic reception.