Two first-time CDO managers are closing a pair of separate deals in the coming weeks, both backed predominantly by CMBS. Real estate investment trust Gramercy Capital Corp. priced a $1 billion CDO last week, and SCFFI GP LLC, an affiliate of hedge fund manager Five Mile Capital Partners, is planning to close a $467 million deal.
As some investors become wary of RMBS-backed CDOs, CMBS-backed CDOs are an expected growth area in the market, according to industry sources. Another first-time asset manager, New York-based CREMAC, is ramping up a CRE-backed CDO it expects to issue this year.
Commercial real estate CDO issuance could exceed $15 billion this year, up from $8 billion in 2004, according to Moody's Investors Service, and while deal sizes historically have been small, relative to collateralized mortgage-backed securities, at $300 million to $500 million, larger deals such as Gramercy's are in the pipeline, according to Moody's (see ASR 6/6/05).
Gramercy, for example, will use the proceeds of its CDO as a matched-term funding source to finance its portfolio, refinance its warehouse activities and pay for additional investments.
The New York-based asset management firm is putting all of its loan investments it has either originated or acquired since its initial public offering last August into the CDO. Gramercy originates loans secured by commercial and multifamily properties. As of May, the company had $1.2 billion in assets under management.
The initial portfolio consists of 34 floating-rate loans backed by 261 multifamily and commercial properties and partnership interests in the related borrowers; about 41.9% are whole mortgage loans; 41.8% are B-notes; 14.7% are mezzanine loans; 2.6% is interest in a mezzanine credit facility to LNR; and 1.6% is a preferred equity position, according to a Fitch Ratings presale report. The initial collateral portfolio has a weighted average life of 2.27 years, and a reinvestment period of five years.
Wachovia Securities is the lead manager on the deal, and Goldman Sachs is co-manager. Wells Fargo is serving as trustee.
Gramercy's deal will consist of $810.5 million of investment-grade notes, $84.5 million of non-investment grade notes, and $105 million of preferred shares. Gramercy plans to retain all of the non-investment grade securities and equity. The weighted average interest rate at issuance of the investment grade securities will be 49 basis points over three-month Libor, and the deal will have an expected term of 10 years, with a five-year reinvestment period. The expected closing date of the transaction is July 14.
Five Mile's deal, FMC Real Estate CDO 2005-1 is being lead managed by Deutsche Bank Securities, with Banc of America Securities, Goldman Sachs, Morgan Stanley, and as Wachovia co-manager. LaSalle Bank N.A. will serve as trustee. The initial portfolio of $352.6 million contains 23 floating-rate and two fixed-rate loans backed by 71 properties, with a four-year weighted average life. Roughly 59.2% of the loans are B-notes; 37.8% are mezzanine loans, and 3% are whole mortgage loans, according to Fitch. The CDO has a five-year reinvestment period, and is expected to close in July.
Five Mile Capital is a hedge fund manager launched in February 2003 by former employees of Salomon Brothers, Greenwich Capital Markets, Kidder, Peabody & Company, and Paine-Webber Inc.
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