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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 Brian P. Lancaster: Nelson Hioe: So you think this will be the year we will see more a fair number I certainly agree with David on a couple points. CDOs and alternative of CRE CDO’s as well as mezz securitizations? forms of securitization are coming back, that is for sure. I think the development of new financing structures and products is constructive David Nass: for the overall market, and generally speaking don’t see anything We went from a fair amount of issuance of CRE CDO’s pre-crisis wrong with investors having a broader set of opportunities to place to zero over the last several years. What we observed in our their capital. successful issuance in the fourth quarter is that there is appetite for well structured securitization of second liens, and I think that The bigger issue is whether the pricing of the bonds reflects the true we will see more of that in 2013. risk-adjusted return of the underlying collateral. In that regard I think it is incumbent on the investors in any of these products to do Brian P. Lancaster: the requisite amount of work that enables them to get comfortable with the risk profile. Right now, short term paper that carries any Regarding CRE CDO’s, do you think you’ll see more CRE CDOs sort of yield is in extremely high demand, and you hope that folks backed by whole loans? What other collateral types might we are underwriting the properties and not just a set of strats. Investors find in the coming year? Mezzanine loans, B-notes, B-pieces? have felt burned in the past not necessarily because the products were fundamentally faulty, but because they were mispriced in the David Nass: marketplace. I think if the goal is to have a well functioning market, I wouldn’t say B-pieces. CMBS investors would prefer to see it is in all of our collective interest not to have boom and busts with B-pieces purchased and retained by the B-piece buyer. Financing periods of tremendous issuance and then periods of nothing as conduit B-piece acquisitions through CRE CDO’s is a pre-crisis people are licking their wounds — and that is accomplished by having trade that will likely not be repeated. Let’s compare and contrast an investor base that is educated about the risks and rewards. where we are today versus where we were. Today, securitizations backed by mezzanine loans and/or b-notes are financings. It’s Bruce Cohen: not an off balance sheet trade — it’s a financing that is taking place The “technology” of CDOs was a valuable addition to the financing in the capital markets. It’s not an execution where the equity is toolbox. For those originating or otherwise investing in whole loans, only 5%; it’s a transaction where the equity owns and retains a conditioned to retaining the risk and holding to maturity, it provided considerable amount of risk. These types of executions are used an attractive means of finance. Interestingly, in those cases, the as an alternative to recourse financing on the balance sheets of securitizations actually performed reasonably well from a credit financial institutions and can be executed assuming reasonable perspective. The problems in the CDO space came largely from the leverage and conservative structures. underlying collateral being financed. Poor credit, highly leveraged or speculative loans or mezzanine loans aren’t well suited for a Regarding the UBS lead mezz securitization, the equity retained securitized financing vehicle. by the issuer was 41%. That’s clearly a financing. The distinction is that the issuer retained the risk. They liked the loans they made Taking nothing away from the successful securitization UBS and they retained the risk at the end of the day. That’s wildly different recently completed on mezzanine loans, leveraging already leveraged than buying and pooling subordinate conduit B-pieces, issuing positions has a meaningfully higher level of risk than that associated highly rated securities while retaining only a small percentage of with whole loans. Given the challenges associated with resolving the equity in the CRE CDO. defaults in securitized loans, those are exponentially higher when sitting in subordinated positions. Brian P. Lancaster: Certainly that is an important distinction. Some CMBS investors tend to run for the hills when they hear the word CDO. Nelson and Bruce, do you share similar views with David on the reemergence of this asset class? A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 11


CRE Finance World, Winter 2013
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