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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 11 and can figure it out. You have to examine the new capital — is their process going to be unpredictable? That’s probably the scariest thing. Or are they going to be consistent buyers? They’ve created and bought a lot of bonds. Maybe because they’ve bought AAA, they are actually pretty astute, and good credit buyers that AAAs can rely on. Conversely they could be highly unpredictable and be there one day and then not be there the next. Like Lainie said, we are trying to find buyers committed to the business of manufacturing CMBS and not just the trade. Paul Fiorilla: Is there enough product to meet the demands for all these buyers, if it is true that there are a dozen or more that are active? Jon Strain: Last year S&P had put out some research examining whether there was enough capital for the issuance calendar. I think each time we go through a boom, we question whether there is enough capital. There really aren’t that many conduit shelves right now so I do think the technicals are probably more in the sellers favor right now. Last fall, I think each of us who tried to auction a B-piece, realized there weren’t enough investors to fill everyone’s dance cards. It’s amazing how things have changed over the course of 6 months. Lainie Kaye: In the B-piece buying context there could definitely be more volume with the amount of interest that seems to be there. The depth and level of interest seems to be stronger and stronger. On our shelf we don’t have the volume to feed the appetite at this point consistently. Paul Fiorilla: There are two concerns that I have heard related to the impact of this topic. One is about pricing and the other is about loan quality. My understanding is that B-piece prices have not changed meaningfully over the past year, while the spreads on mezzanine debt have come in quite a bit. Sam, why is this? And is it likely that B-piece prices will rise if there are more bids from an increasing number of buyers? Sam Chang: When you look at how much the BBB part of the mezz stack has moved, they were at about swaps plus 900 at the end of 2011, just about 500 over swaps at the end of 2012, and now they have come to back to 300 again this year after a blip to 400 about a month ago. So there is a lot of volatility there. If you look at the buyer base for that, it’s a little bit different than the buyer base of the B-piece guys. The B-piece guys are targeting a certain default yield at the end of the day and it’s a much longer term investment for us. We are not here to buy the B-piece for a month or to trade out of it any time soon. Because it’s a much longer investment period, the terms that are driving the bids are going to be a little bit stickier. I think that’s why the pricing of the B-piece has been more stable despite the volatility at the BBB part of the capital stack because the default adjusted returns of B-pieces has remained within our targets despite the drift in credit from 2010. Matt Salem: I also think credit has deteriorated as well. Maybe the average LTVs have increased marginally, but addressing the topic we touched on earlier, with B-piece buyers really buying the tail of the pool, and you can measure the tail by leverage, or for example we have our own internal credit metrics that we generate. But by anybody’s standards, the tail of the pool has gotten bigger. Outside of just the size of it, the tail has gotten moderately riskier. When you think about returns, people are buying BBB and swaps plus 325 and a 5% all-in rate; clearly they are not pricing a lot of credit loss in those bonds. There is some priced in but not a lot. We only think in loss adjusted returns, because we are buying the first loss and we do expect losses to happen. I would argue that the lossadjusted returns really haven’t moved that materially on the entire B-piece over the last 12 months when you take into account the changes in credit. Lainie Kaye: From the credit perspective of an issuer, our credit department doesn’t decide based on what the B-piece bids are, the trends, or where pricing comes in or that there are ten new buyers. Credit is looking at the loans the same way they did a year ago and two years ago. From an issuer’s perspective, that hasn’t changed really at all, and goes back to Jon’s point, competing more on pricing than on credit quality or structure. Frank Scavone: I don’t understand how you can have a conversation about price if you don’t have at least a realistic expectation around the collateral performance that constitutes your baseline scenario. Only then can anyone decide how much they should be paid for a given risk profile. One of the things that I’m really amazed with when raising capital, is that most pension plans don’t say, we want to get as much yield as we possibly can. What they are looking for is to achieve the yield that will facilitate their ability to fund their anticipated liability stream and to take as little risk as possible in that process. When you look around the world, you see that most of these guys want a safe 8–11%. Most B-piece funds are going after loss adjusted 14–16% plus returns. So with gross yields in the 18–20% range, it just comes down to not having a disaster. CRE Finance World Roundtable: The B-piece Buyer


CRE Finance World, Summer 2013
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