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CRE Finance World, Winter 2012

Roundtable: Outlook 2012 Brian P. Lancaster: issues rearing their head that number has come down considerably. Doug, you mentioned before the impact of that volatility on your Second, and perhaps more fundamentally, there is a basic mis- match between the bonds that need to be acquired and the capital end of the business. What do you estimate 2012 CMBS issuance to be? And what do you think of the composition? Do you think available to do so. The typical buyers of credit bonds (AA, A, BBB, BBB-) from 1.0 have largely gone away, those buyers being longer- it will be conduit fixed, any floating rate deals, what do you see going forward in the year? term money, due to feeling burned from legacy portfolios. In addition, 2.0 buyers, who were predominantly hedge funds and other shorter- Doug Tiesi: term forms of money, have been impacted very significantly by mark to market issues. And those were the guys who were buying earlier I don’t think our house view is too different from the rest of the market. this year and driving yields quite a bit tighter across all sectors. We came up with a range of $20–30 billion. We did formulate those So there’s a gap right now in the supply and demand dynamics. numbers during the late summer early fall which was in the heart Interestingly, AAA bonds have done quite nicely, especially with of the slow down. Perhaps with increased origination volumes the re-emergence of the 30% subordination class. This says to me over the last 4–5 weeks, we could expect to hit the higher end that while AAA bonds are viewed as basically unbreakable, there’s of that range. There’s even a possibility that we exceed that $30 a lot less certainty around the credit bonds and thus anyone looking million mark if markets cooperate and Europe does not generate to buy them will have to do a lot more work to get comfortable, increased volatility. With regard to other products there is a lot of which may be reflecting the fact that people don’t feel like they are chatter out about non-performing loan financing and floating rate getting paid to stick their neck out. programs. There have been two prominent floating rate transactions that were priced in the market with varying levels of success. I am Steve Kraljic: sure that there will be transactions in NPLs and there will be floating rate transactions into next year, but I don’t see the market composition Brian you made a comment you are hearing a similar type of changing dramatically. You are going to see the market dominated discussion from other insurance companies that are really leaning by conduit transactions; you’re going to see some large single more toward direct lending. There’s is safety in numbers when borrower transactions, an occasional NPL and floating rate secu- you have this sort of volality. Right now it’s a flight–to-quality kind ritization. Floating rate CMBS loans are generally not competitive of mentality out there. It will stay that way until someone is bold with commercial banks syndicated loans. Floaters will not be a enough to dip their toe in the water to say it’s safe to venture outside game changer for 2012. this low risk comfort spectrum, which I don’t expect until we see some clarity on what’s going to happen with Europe. But the other Brian P. Lancaster: thing, too, within the 2.0 mezz space, which is a little concerning to me and other long-term investors and it may be somewhat of Nelson, give us your thoughts as to what has accounted for the an impediment for traditional mezz buyers from getting back in, dramatic widening of spreads in credit bonds (AA, A, BBB) since is the emergence of fast money in that space. I generally try and their peak in Feb 2011? get color on what type of accounts are participating on new deals when they’re priced, but lately I haven’t seen as much transparency Nelson Hioe: there as I would like. That makes me a little fearful that some of There are a lot of issues out there, but if I had to whittle it down the more recent deals priced in the second half of 2011 in the to the main two, I think clearly the issues with Europe are huge; AA, A, BBB classes, have really been dominated by fast money. fundamentally there is higher beta as a result and it’s harder to A lot of the traditional buy-and-hold mezzanine investors have not price risk, and it’s being reflected in bond spreads especially in been participating in 2.0 mezz. So I’m curious as to who is? I check the non-AAA classes. Interestingly, I feel like there’s a little bit of the holdings on Bloomberg and I do see some life companies in a disconnect between the equity and debt markets in that regard. there but they tend to be small ones and some perhaps new to the Equity indices have oscillated in a range, albeit with large daily game. Then there’s a lot of unaccounted for bonds which are in the swings, but the bond market has moved decisively in one direction. hands either money managers or fast money, more likely. In that regard, on the volatility issue I disagree a little bit with Steve in that I think volatility is a driver as opposed to a symptom of the Brian P. Lancaster: industry getting hurt. I think a good comparison is if you look at the Nelson, what are your thoughts about the current debate regarding early part of the year when there was less volatility, people were the role of the operating advisor? Steve from your perspective talking about $50-$60 billion in issuance. With some of these what is your view of the Operating Advisor (OA)? A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 15


CRE Finance World, Winter 2012
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