Page 73

CRE Finance World, Winter 2012

Investment-Grade Investors Sub-Forum Update — Trials and Tribulations Managing Director,Stephen Kraljic CMBS Portfolio Manager TIAA-CREF Financial Services Chair-Elect, CREFC Investment-Grade Investors Sub-Forum R makes sense that investors want the sector to function deals than ever before. The level of pushback from investors evenInvestors’ concerns within the Forum included slipping underwritingstandards, aggressive pricing and inadequate credit enhancementlevels. The overarching theme was that investors are doing morehomework and demanding more due diligence from issuers onecent trials and tribulations of the CMBS market havebrought investors back to focus on the basics. Whilemany would argue new deals are getting done, the CMBSmachine is not working as efficiently as it should. It only normally, and a healthy pipeline and liquid market are keys to that resulted in structural changes to deals, helping CMBS evolve into success. CMBS is always demanding more information, and the a better investment model, as the attempts to build a better current need for disclosure and understanding assumptions is even mousetrap continued. more critical. Basic fundamental standards need to be followed, including investor reporting and reps and warranties. We are The IG Bondholders Forum seeks to create a series of basic building requesting evidence of operational checks and balances with an blocks to help CMBS return to a semblance of the 1999-2004 advisor, underwriting and rating agencies. “golden era,” when markets functioned well, spreads were stable, underwriting was sound and discipline was maintained by all The optimism of early 2011 soon turned into nightmarish flashbacks industry stakeholders. With the current market instability and of 2008–2009, with the market freezing up, ironically, just as the continued evolution of CMBS 3.0 as the backdrop, the Forum held weather started to warm. A confluence of debilitating macro events a series of discussions throughout 2011 to explore what investors starting in the late spring — underwhelming economic leading think can be improved to guide the market back towards the road indicators, the downgrade of U.S. creditworthiness and European to recovery. The concerns and suggestions raised by investors sovereign debt fears — helped wreck what might have been a were narrowed down to five key issues, with the goal of creating watershed year for CMBS. an unofficial CMBS investors’ “Bill of Rights”. (Please note that the opinions expressed here were collectively tabulated from a majority While other asset classes faced similar headwinds, CMBS generally of investors and do not necessarily reflect my opinions or those of did not fare as well. Volatility within the space remained at histori- my firm). cally high levels, leaving investors to ponder whether something dysfunctional still remains endemic to CMBS. Clearly, there are 1.The need for an adequate disclosure/marketing period for deal issues in a sector which, based purely on borrower need, has the analysis, particularly during periods of high market volatility when capacity to issue $60-75 billion annually but is falling substantially issuers appear to race to get a deal priced. The Reg AB provision short of that. in “Dodd-Frank” may address this with a proposed requirement of five business days. In 2011, CMBS investors showed their concern of the sector with their dollars. Stat? Even more impressively, this occurred with new 2.The creation of more investor confidence in rating agencies through issue supply at a premium (only $30 billion), which would typically such options as rotating agencies on deals, modifying rating fee imply an inherent scarcity value in securities leading to less price structures, and adding more transparency to the rating process. differentiation between deals. Yet, market volatility aside, we did see fairly disciplined investment behavior, with some deals priced 3.Acceptable collateral underwriting standards and transparent significantly better than others while other deals struggled just to disclosure on loan structure and underwriting assumptions, get bonds sold. including explicitly divulging “pro-forma” underwriting, a history A publication of Winter issue 2012 sponsored by CRE Finance World Winter 2012 71


CRE Finance World, Winter 2012
To see the actual publication please follow the link above