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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 15 Richard Walsh: We were lending on the floating rate side in 2011 and 2012 and saw little competition from the banks. Over the past six months banks have not only come back into the market but they have compressed pricing very substantially. I think you’re right, if they want a deal, they are going to win it. Jon Strain: As insurance companies, you have a liability stream that you are managing against. Securitizers have the liability stream of, what CMBS buyers will pay for the loans, and the rating agencies’ rating alchemy. But the banks have deposits they are paying less than 50 BPS on, so any loan they make is positive incremental spread and they need income. So banks don’t seem to have a natural governor on the low end. Their ability to compete is very difficult to hold off. Brian Lancaster: Jon, at last year’s Roundtable, David Nass of UBS mentioned that he expected 2013 to evolve with more esoteric securitizations by structure as well as by asset class such as liquidating trusts, floating rate securitizations, CRE CLOs and CRE CDOs as well. How much of this type of issuance did we see in 2013? Do you expect to see increased issuance in more esoteric deals in 2014? If so which types? Jon Strain: A lot of it was a function of what the market had to offer lenders. There was a lot of non-performing loans trading hands and people were looking to finance assets that they now owned. I think two NPL deals got done last week; one by Credit Suisse and one by Wells Fargo, so there are a couple more dealers but the pools have been a lot smaller. I don’t think we’ve really seen as much opportunity there since banks have repaired their balance sheets. There have been one or two healthcare deals, and healthcare has been a niche — it’s not one of the main food groups. You may start to see a little more inquiry there. We are starting to see people with business plans that look to issue commercial real estate CLOs. Some of the issuers have gone with a REMIC, but they are experimenting with offshore vehicles that could include a ramp. A couple issuers have successfully executed deals where they’ve got the replenishment capability, but those are anecdotal so far. We haven’t seen a lot of it. Brian Lancaster: And what would be the collateral? Would it be mezz or transitional property types? Jon Strain: I think transitional senior loans are where we go first. There is only one mezz CDO done offered broadly, and that was the Redwood Trust deal done last year. A couple deals have been done privately with one investor. People largely view those deals as a vintage trade. The issuers were very early in the cycle providing low LTV mezz capital behind relatively conservative mortgages. Conduit leverage went up by about 10 points over the course of the last two years and so that low LTV mezz doesn’t exists as much in the current market. I think we will see fewer of those in the near term. I don’t think the market is telling us they want to see mezz CLOs unless they are static. There are a lot of people who own portfolios of mezz who would like to get financing because yields are just so low on an absolute basis. There is more demand from the issuer side than there has been investor interest so far. Maybe that will change, but investors are still a little nervous about the leverage embedded in that strategy. I think somebody who has a business model to buy mezz will be able to finance it but I don’t think you’ll be able to get financing to go buy mezz. Brian Lancaster: Credit quality-hot topic right now. There has been increasing concern regarding the deterioration in credit quality. CREFC’s upcoming CMBS credit quality seminar in NYC quickly sold out. Should we be worried? Where do you see the deterioration occurring, more IO loans, higher LTVs, lower debt yields, or other less obvious areas? Jon Strain: Well it seems like it’s a topic, there are several trade publications where that is a theme they want to hit on. I would say that different originators are having different experiences. For those of us in a large bank under regulatory scrutiny, there is less incentive to get too crazy on credit quality because there is so much criticism to be had. I think people who are in more of a boutique environment can take some risk that way. The prospect of a kick out or re-pricing is easier for them to handle without the regulatory scrutiny. I don’t feel like there is that much bad underwriting going on but people are certainly starting to throw stones. I’ve seen some loans that other people did that we passed on. I love amortization, I’d like every one of our loans to have amortization, but at some level of LTV, maybe you’re pre-amortized and you don’t need it. What is that level? There is no rule. The QCR definition that the government has put forward in Dodd-Frank is so low that sometimes it feels a little unattainable. I do think on the margin originators are competing on structural aspects of loans like reserves and carve outs. There is going to be more slippage as there is more and more competition. Randy Wolpert: We are looking at lots of loans and we’ve seen the same loans from multiple originators either on separate tapes or otherwise. We may see it at two different loans amounts or with structural differences, some quite significant, so clearly someone is reaching. We are seeing a lot more I/O, and I think Jon is right, if you have the right leverage level; it’s not something that we look at and say it is egregious. But there is a fine line on interest-only periods and leverage levels especially combined with the other things that we don’t like. That’s where we start seeing deterioration: CRE Finance World Roundtable Discussion: 2014 Outlook


CRE Finance World, Winter 2014
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