Germany – Banks that have financed German property acquisitions by UK private equity firm Terra Firma are to sell €5.4bn worth of bonds backed by those properties in Germany’s biggest commercial mortgage backed securities transaction (CMBS) ever.

Since entering the German market in 2004, Terra Firma has been financing nearly all of its flat acquisitions in Germany via bank loans. In May 2005, for example, bank loans were used to finance 90% of Terra Firma’s €7bn purchase of flats formerly owned by German energy conglomerate E.ON.

Following the E.ON deal and others, Terra Firma currently owns and operates 230,000 flats in Germany.

Now, the bank consortium behind Terra Firma – including Citigroup, Barclays and Eurohypo of Germany - said that by the end of July, it would sell €5.4bn in bonds backed by Terra Firma’s properties.

In the bond sale, geared mostly to institutional investors, seven tranches are being offered ranging from triple ‘A’ rated debt to ‘Baa3’-rated paper. In selling the bonds, the banks are transferring the credit risk from their balance sheets to investors.

“The road show begins this week and we plan on completing the bond sale by the end of July,” said Amanda Thomson, managing director of Citigroup in London.

Thomson added that as the bonds were backed by a portfolio of 164,000 flats, “the risk is well spread”.

Although CMBS are normally backed by commercial property, multi-family housing like that which Terra Firma owns and operates can be used as well.

Industry experts say that last year, €5bn in CMBS backed by German commercial property were issued. The Terra Firma transaction, worth €5.4bn, is Germany’s biggest single CMBS deal to date.

CMBS were first launched in the US in the early 1990s and have since swelled to a $500bn market globally, though most of that volume is in the US. Last year, CMBS issuance in the US totalled $170, while issuance in Europe was $56bn.

Real estate experts say, however, that CMBS is Europe is growing dynamically, with $75bn in issuance expected for 2006.