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CRE Finance World, Summer 2013

Paul Fiorilla: Frank, you’ve expressed concern that credit quality may be eroding. How do you see the market becoming more aggressive? Frank Scavone: There are very big differences in the credit practices of the various lenders and we are well aware of this. Certain teams out there continue to engage in very good underwriting and we are going to focus our deployment efforts on these groups. If we can’t engage in reality based conversations on the underlying credits involved, we just stay away from those shops. And right now, to answer your pendulum question, the market is such that you still have the ability to pick your transaction partners. Paul Fiorilla: Jon, you have been issuing CMBS for a long time. How are B-piece buyers scrubbing pools today compared to previous points in CMBS history? Jon Strain: I’ve sold a lot of B-pieces over the years to a lot of people on the panel and others, and the number of B-piece counter-parties there are right now tells you that we aren’t at a scary place yet. The market has gotten more aggressive since 2010, though we still weren’t sure what the market was going to look like in 2.0. We hadn’t made loans in a couple years so it was all baby steps. Now there is some competitive dynamic but I think there are lines that people are trying not to cross. I think the rating agencies are starting to speak out about what they think is too much leverage. People feel very good about the fundamentals right now, from low levels of construction to the health of major tenancies — I feel like this is going to be a good vintage in retrospect. I’m not particularly worried about credit right now. As a broker-dealer originating loans for securitization, credit isn’t the scary part, it’s competing on price and how you hedge yourself. Those are things that are harder for a broker-deal to handle. Paul Fiorilla: Frank mentioned that some of the issuers are engaging in good credit practices. Is there that big of a difference from one shop to the next? Does anybody else see a big bifurcation between issuers? Jon Strain: I think from the big picture, the deals look alike if you are looking at the averages or top 10 loans. I think to a B-piece buyer, it may look different because they are buying the weakest five–10 loans. On the margin, they are going to know it better than anyone else because the sequential pay aspect of the trust that benefits the investment-grade buyers works against the B-piece investor. CRE Finance World Summer 2013 10 Frank Scavone: That’s exactly right. At first blush, given the overall characteristics that these transactions possess, it becomes easy to understand why so many prospective participants are starting to chatter about getting involved. But until you get down to the underlying collateral and understand with some reasonable degree of probable expected loan-performance, you cannot justifiably feel comfortable committing capital. Paul Fiorilla: On the topic of the number of players, there have been news reports that identify a host of new players who intend to bid on new deals. Historically there has been a very small group of B-piece buyers, and now it seems like there are a lot more, some more active than others. Lainie, are we really seeing that many new players and what is their impact on the market? Lainie Kaye: I’ll answer this in two phases. We are seeing a lot more bidders and interest across the space, whether it’s from traditional piece investors, fund managers or hedge funds some of whom are looking to potentially pair up with a due-diligence company and buy their first B-piece. We are interested in selling B-pieces to those investors who philosophically view this investment not as a trade, but rather a business. Some of the investment grade buyers are starting to look at that as well. We’ve definitely gone out to some new buyers. As long as we understand how they’re looking at credit and that they are a credible entity, combined with their due diligence sources in looking at the credit, I don’t think it has affected our underwriting, or as Jon says, we are not curtailing or giving away credit or structural features, rather, we are competing more on pricing. The fact that there are many more buyers looking at the space or circling around and talking about getting into it, we are not changing the way we look at loans, price loans, or the way we underwrite or structure. That has remained constant. We’re not talking about lists and lists of loans; we’re talking about a handful of loans that are looked at similarly across the investors. I think it’s good, it has opened up liquidity. It’s made bidding easier because there are several sources. For the industry it’s actually healthy. Jon Strain: As a broker-dealer who has relationships with all different accounts, we really can’t be afraid of new capital. As a matter of fact, we have to be open to new capital. I can remember the cartel discussion in the late 90s and issuers were worried the few B-piece buyers had too much leverage on loan sellers. I think these new investors are former Street people who know the CMBS business CRE Finance World Roundtable: The B-piece Buyer


CRE Finance World, Summer 2013
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