While A-Rod was unanimously expected to re-sign with the Yankees, panelists at IMN's Real Estate Mezzanine Loan Forum in New York last week were not as certain about the future of the CRE CDO market. A group of panelists made up of CRE CDO managers and a CDO lawyer collectively agreed that value in the commercial real estate market has not yet bottomed out. They also agreed that CDO write-downs were not over for the major banks.
The silver lining is that the CRE CDO market will not be gone forever, the panelists said. Brian Hebb of Northstar Realty Finance Corp. said he hoped to see high-tier managers begin to make a comeback from a period of limited issuance by the end of 2008.
When the market does come back it will not have the same pricing, added Geoffrey Jervis, chief financial officer at Capital Trust.
Indeed, many of the more complex structures will have to pay a premium they were not doling out before. "[Managers] will have to start paying up for complicated deal structures," said Richard Jones, partner at Dechert.
CDO managers also mentioned that investors had expressed interest in static deals. However, Hebb was not completely convinced that these structures would be beneficial to the market because of "adverse selection."
"Replenishment by a good manager protects the CDO," he said, adding that once the good loans pay off in a static pool, the investors could be left with the poorer-quality, nonpaying loans with no exit strategy. In a managed transaction, the manager may be able to restructure the deal to avoid exposure to those bad loans.
Repo providers will also weed out the stronger CDO managers, Jervis said, noting that they will be a lot more selective about whom they chose to lend capital to.
A Cash Relationship
While issuance in the CRE CDO market remains stagnant, CRE firms are getting by with a little help from the banks. The types of collateral originated will remain be the same, but changes in the CDO market will change the way that the debt is structured, Hebb said. "We are using our bank relationships to gain funding such as term facilities, limited recourse warehouse facilities and other forms of funding that were available before CRE CDOs," said Hebb. He added that the firm will increase its syndication role going forward, syndicating higher portions of the loans and keeping the junior debt on their balance sheet.
Whenever the CRE CDO market does come back, those who own and originate the debt placed in their own CDOs will also have an easier time getting transactions done, Hebb said, since these managers are closely involved with the collateral.
However, certain collateral may not be as easy to place in the vehicles, specifically land and condo conversions, as well as anything "off the run." However, if the loans are sized appropriately, it is not impossible to get a deal with that type of debt done, Jervis added.
CRE CDO issuance remains on the sidelines for now. Anyone who has originated in the past nine months has been wrong to do so, Jervis said, noting that spreads are a lot wider and any deal that was recently issued can be bought even cheaper today.
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