CRE Finance World Roundtable: The B-piece Buyer A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 9 Moderator: Paul Fiorilla Prudential Real Estate Investors Participants: Sam Chang Director Torchlight Investors Lainie Kaye Managing Director Deutsche Bank Matt Salem Managing Director Rialto Capital Management Frank Scavone President and COO — Capital Partners CBRE Capital Partners Jon Strain Managing Director J.P. Morgan Paul Fiorilla: Thanks everybody for joining our panel discussion on the B-piece market. As someone who has covered the CMBS market since the mid-1990s, I’ve always thought that B-piece buyers were the main gatekeepers of loan quality. In early years, a handful of investors raised the ire of issuers by kicking out a lot of loans. Then in the frothy years, B-piece buyers were a lot less careful as they resecuritized the bonds they bought and passed the risk to CDO investors. Sam, where are we now in terms of the pendulum as far as negotiating power between B-piece buyers and Issuers? Sam Chang: To take it from the top, let’s look at where we are in the credit cycle. Between 2002 and 2007, and the latter part of this period being the CDO years as Paul mentioned, there was a tremendous run-up in commercial real estate valuations and decline in commercial mortgage underwriting quality. So using 2002 and 2007 as a rough peak to trough, for example, let’s see roughly where we are in the credit cycle. If you take metrics like LTV and the percentage of loans that have some sort of IO period to them, I’d say we’re still far from the 2007 vintage in terms of credit quality. Many in this industry got used to 2010/2011 vintages, this period’s 2002 vintage. Even though we’ve veered from that level of quality, I don’t think 2013 is a bad vintage yet. We should be careful not to let this pendulum swing too far. Given all this, I’d say the B-piece buyers are at a point where we don’t have to kick-out too many loans. But again, things can change if the pendulum swings back to 2007 type origination quality. Matt Salem: There are a lot of participants in this market. I think that B-piece buyers, given that we are buying first loss positions, we are highly sensitive to the credit in the pool. We do serve as a first line of defense before the credit goes in the pool, however there are a lot of other investors in the capital structure. There are rating agencies, loan originators, credit officers, and all these constituents have a say in whether to participate in the market and how to participate. While I do believe that perhaps we have a louder voice given the timing of when we come in, the due diligence we conduct, and the risk we are taking, it is still important for BBB buyers, A buyers, AA and AAA buyers to have a voice as well, and to help control credit. At any one point in time there are different competitive dynamics at each of those tranche levels. Keeping in mind the rating agencies and internal credit committees too. I think about it as a chance to enhance our returns by creating a better credit but I hope that the rest of the market thinks about it the same way.
CRE Finance World, Summer 2013
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