Demonstrating strength against both mother nature's wrath of hurricanes and father capitalism's M&A activity, CDOs backed by commercial real estate assets continue to show strong performance, according to Fitch Ratings. In fact, the number of upgrades in the sector has outpaced downgrades by a ratio of 13.8 to 1. In a review this month of all outstanding commercial real estate CDOs, the rating agency not only found a ubiquitous trend of strong performance, but a slow transition in underlying collateral and structure of the deals.

For example, transactions issued prior to 2002 had the following average collateral composition: 54.3% real estate investment trust debt; 42.6% CMBS and 2.8% "other" ABS. That mix is quite a variance from this year's average offering. Take NorthStar Realty Finance Corp.'s N-Star Real Estate CDO, brought to the market last month. The $500 million deal includes a 70.8% CMBS concentration, 19.8% allocation for REIT debt and 5% and 4.4% for CRE CDO notes and other commercial real estate interests, respectively. Additionally, it is "lightly managed," according to a presale report issued by Standard & Poor's.

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