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CRE Finance World, Winter 2013

CRE Finance Roundtable: Outlook for 2013 their role. They are taking the most risk, so naturally they are going So from a credit and structural perspective, I would say things are to take the hardest look. I’m just worried as things expand, that becoming somewhat more aggressive, in particular post-QE3. It you’re not going to be able to cover things, and we are going to had been drifting over the course of 2012, but I noticed a fairly start repeating some of the old problems at the basis level, which material difference between pre-QE3 and post-QE3 deals. Between is the collateral level. those two times, I think NOI debt yields came in by approximately 100 basis points, and the pools feel a more bar-belled than in the Brian P. Lancaster: past. So as a B-piece buyer, it makes the investing landscape more Nelson, are you in agreement? As a B-piece buyer, are you seeing treacherous, which is part why there are not a ton of buyers out credit deterioration or kick-outs increasing? Also, if you could there. It’s a lot of work and it’s a high risk proposition. talk about the traditional conflicts of interest and concerns that investment grade buyers had with CMBS 1.0 and how they are The counter argument to what I’m saying is that the AAA buyers being addressed in 3.0? can still sleep very well at night knowing that they have 30% subordination, which makes it highly unlikely on any deal in 3.0 Nelson Hioe: or 2.0 that these investors would lose principal. But the overall shift in credit, while subtle, can change the risk profile for B-piece In general, I agree with Francisco’s comment about 1.0 deals. I bonds, because we are fully exposed to the riskiest loans. would say the underwriting today is materially better than some of the peak underwriting that we saw in ’06 and ’07. Having been Brian P. Lancaster: a part of PPIP (Public Private Investment Program, in which funds were raised in conjunction with the US Treasury to acquire legacy You said one can sleep well at night at the top of the capital RMBS and CMBS securities), and having looked at a lot of the structure but the price you pay are low yields, Francisco’s issue. ‘05-‘07 deals, I can say that with a high degree of confidence. You start hitting floors that you just can’t live with and then you With that said, if you go back to when 2.0 deals started in late have to go down in credit. 2010, there has been a shift since then in terms of where credit has gone. Increasingly we see a more IO loans with a partial or full Nelson Hioe: term. While we do not see pro forma income, leverage has gone The irony of investors piling into AAA bonds, and pricing them up, the quality of the markets has suffered a little bit and structure extremely tight because it is a form of risk aversion, actually has started to erode somewhat. I’m not sure investors or rating perpetuates the cycle that we are talking about of increasing risk agencies have explicitly given enough credit to loan structure, seeking on the part of originators. It leads to better execution for which I think is partially why it is one of the first things to go. As them in the capital markets. To put it another way, if investors are a B-piece buyer, I pay a lot of attention to that. effectively insensitive with respect to relative riskiness between Deal A and Deal B because they are buying AAA bonds, they are in Brian P. Lancaster: effect rewarding the deal with the riskier loans. There is an interesting Can you talk more about the structural changes? feedback loop here that we should all be thinking about. Nelson Hioe: David Nass: On the structural changes, I would point to things like cash sweeps, One thing that I would add that needs to be highlighted is that where the trigger thresholds have become less lender-friendly. there isn’t a bank in the securitization business today that can In addition, we have seen that the sizing of reserves to protect afford to make loans meant for securitization and keep them on against roll risk has become more aggressive; a corollary to this their balance sheet. If a B-piece buyer removes assets from a deal, being that the estimated TIs and LCs are smaller than what is that causes a tremendous amount of internal concerns. Many firms actually required in a given market. All of these items that I think have have zero tolerance for loan kick-outs. At UBS, we write loans could be helpful in better aligning sponsorship with the lender. that are securitizable and we do not have any kick-outs. Structural considerations are generally qualitative in nature; they don’t show up in a strat or in an OM, but at the margins can be very That’s a significant different business model than the one that powerful in keeping the sponsors engaged in the properties when was in place pre-crisis. When it comes to making loans, the focus things get rough, or keeping their feet to the fire, which I believe is is making loans that are sellable, structured properly, and have a form of value preservation. the right leverage points. We can talk about the various stages CRE Finance World Winter 2013 14


CRE Finance World, Winter 2013
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