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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 that kind of value. So we do continue to see CMBS as attractive on Brian P. Lancaster: a relative basis. Now on an absolute basis, that is what is becoming Given that you mentioned that you have to be careful when a little more challenging. you look for yield, what is your view on 3.0 in terms of the credit quality? Brian P. Lancaster: What do you mean by “on an absolute basis” becoming more Francisco Paez: challenging? It’s a mixed bag. There are two different aspects that we think about when assessing the risk of 3.0, one being the structural Francisco Paez: characteristics of the deals, and the other being the credit of the From a yield stand point. You have the last transaction right now, collateral. From a structural standpoint, I do think that 3.0 versus the AAA risk was probably 140 basis points of spread for the AS 1.0 did address some of the more glaring faults in the structure. tranche and the super senior was in the low 90s. In a low-interest However, I do think there are some areas that haven’t been addressed. rate environment, you have a liability benchmark to beat that becomes In order for the sector to have the same standing in an investor’s challenging even if from a relative stand point that’s credit attractive. mind as it used to have, we need to fully address some of those issues. Just to name a few of those things on the governance Brian P. Lancaster: front, we still don’t feel there are adequate checks and balances Do you think it’s beginning to approach a point, from someone in terms of how the structures work as it relates to B-piece buyers like yourself at an insurance company, that you have to go down and special servicers. There needs to be some mechanism in there the capital stack to get the yields you need, or you can’t participate? to provide those checks and balances. I feel that is a critical point in many investors’ minds that needs to be addressed. Francisco Paez: From a transparency stand point, I think that the industry has done I think investors, particularly life insurance companies, have to a comparatively good job. That being said, this is a sector where prudently try to see how far down the capital stack they feel they there is a lot more idiosyncratic risk versus other securitized sectors, can go and still be comfortable with the risk/return. But you can and from that perspective we do need more information. In particular, also look at alternative ways of being in the sector. One aspect we with certain property types that becomes more important. For see as challenging when we think about going down the capital example, the information we get on retail loans, I think of how much stack is that you can get tranches that can be thin compared to concentration and risk there is at times, it would be beneficial to how chunky some of the underlying assets can be. I think it has get additional information that we aren’t currently getting. gotten better over the last couple of years, but even now tranches down the capital stack we feel are a little bit of a challenge considering From the point of view of the credit of the collateral, we are obviously the severity of loss that could happen at those tranches. We are nowhere near the peak of the cycle, but we do see a decline in constantly thinking of ways to address those concerns, and we’ve terms of underwriting standards. been able to do that in certain instances to the extent that we find those places where we are comfortable from a credit stand point Bill O’Connor: going down the capital stack. I would agree with that. We are, in the transactions that we’re looking Brian P. Lancaster: at, seeing a loosening of underwriting standards, particularly as deal buying increases. A lot of the actual blocking and tackling, Would you say that generally that has been your observation? knocking on the doors, kicking the tires, whatever cliché you want That you are finding insurance people are going down the capital to use is being delegated to third parties. So when you come back stack further than they were a year ago? to do the review, it’s probably not as tight as it would have been when some of these institutions started this cycle of underwriting. Francisco Paez: It’s not as tight as it used to be. I think it depends on the company and it depends on whether they are doing that for their own book or for a third-party book that has We have to be careful as we go into another increasing round of benchmarks and sector mandates, and may not be as constrained issuances that we don’t make some of the same old mistakes. The from an absolute yield perspective. For those that have to purchase B-piece buyer is playing an important role right now in questioning assets for their own accounts there is a little bit more of a constraint a lot of those underwriting issues, and pushing back a bit, we’ve to continue to participate actively in the super senior space. seen that in some of the transactions. But, that really should not be A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 13


CRE Finance World, Winter 2013
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