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CRE Finance World, Winter 2012

Roundtable: Outlook 2012 Thomas F. Nealon III: Now part of that is systemic with regard to pricing, but there is also Well, transparency is something that is very important to us and a a lot of idiosyncratic risk within the space that I think needs to be process is underway. To be clear, I do not envision that this process addressed. One of the things I’d look for improvement in is under- would allow you to follow any resolution. I think all of us have rightful writing. I also think we need better dealer support in the secondary concerns about thinking that you could somehow follow along market. And I think perhaps most importantly, a longer term view during a work-out, since those of us who do this for a living say it for sustainability; it will help the viability of the market. really is like watching sausage being made. This is particularly true if you are in a judicial foreclosure jurisdiction with all of the associated Right now the biggest impediment to fixing this is the volatility in challenges that come with that. Having said that, I think it’s certainly the space, but I think that’s really more systemic noise and not the right for investors, rating agencies and others that once the loan is root of the problem. There are other asset classes that have faced resolved, to understand what exactly the resolution was, and, when the same volatile environment and yet have still performed better possible, what was the motivation and rationale behind choosing than CMBS. that particular resolution. I think the root of the issue is really all of the uncertainty specifically Jack Taylor: facing the CMBS sector. And we all know that nothing is worse than market uncertainty. There are question marks about whether I think what you were just talking about with Tom is a very important it’s a truly viable asset class in the long run. I think the questions topic for the CMBS market’s growth and resurgence. A fundamental around it have also been exacerbated by the regulatory environ- lack of trust in the CMBS market and deal structures has grown in ment — proposed regulatory enactments, while certainly needed, what I will call “end users” or “ultimate investors” as opposed to day have discouraged a lot critical and necessary stakeholders from traders. For the CMBS market to significantly grow again, this trust participating in the CMBS market. needs to be reinvigorated. One of the pillars of that reinvigoration will be resolution of the conflict issues that Tom was talking about. I say from an investor perspective that issuers appear to have really Investors need to be sure that they are not disadvantaged because taken a short-term view on the market and it’s not helping stabilize of conflicts in the inner working of CMBS structures. They need to things. I think about banks that have reentered the CMBS busi- know that people cannot game these structures, take advantage ness a year ago , and a year later they pull out. That was unheard of them to their own benefit, in violation of the duties owed to in the 1990s. You had CMBS originators, they had long term investors, whether or not it is a formal fiduciary duty. Faith must be branding strategies — for example you had Bear with its TOP shelf restored in the implicit and explicit contract, if you will, between the and First-Union/Wachovia securitized higher LTV loans. In today’s industry and the CMBS investors it serves. market I think a lot of actions are fueled by the quarterly outlook for earnings. Perhaps this is also partly driven by the fact that there Brian P. Lancaster: may be precarious job security for bankers, especially with the Completely agree. Let’s look at the CMBS market from the inves- European based banks. Many issuers don’t seem to be looking tors’ perspective. Steve, is the CMBS market broken and, if so, much beyond the next deal and there appears to be a very short how can we fix it? What is the biggest impediment to revitalizing leash from management on underperforming business line P/L’s. the sector? You can also see this in the timing of the deals. Investors have had Steve Kraljic: as little as three days to look at a deal. Not enough time, really. So, I think some of the comments here earlier indicate that there is those are some of the key things that need to be examined in the a greater capacity. If there indeed is capacity for $50 billion to market. And the final thing that was touched on, is ratings — an- $60 billion of annual issuance, and maybe $75 billion in the longer other big uncertainty. If I buy a security that’s rated AAA today, will term, and we’re only seeing $30 billion, then there is something it still be AAA in a year from now? Is the rating methodology going broken. It sort of reminds me — I make the analogy to the joke that to change? I think it’s just one more layer of idiosyncratic risk that used to be made about American cars in the 70’s and 80’s: the investors have a hard time tolerating. fundamental structure is sound, but it’s just the quality of inputs is not where it needs to be. Brian P. Lancaster: Doug, comments? A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 11


CRE Finance World, Winter 2012
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