The recent announcements of Credit Suisse First Boston and Salomon Smith Barney about new hires on the large-loan end have put this area of the CMBS business back in the spotlight.
As reported in last week's ASR, Salomon's Joe Franzetti, who was the former head of the bank's conduit business, is now heading the bank's brand new large-loan group. The bank just hired CMBS veteran Ron Wechsler to manage Salomon's conduit business (ASR 7/16/2001, p. 1).
Prior to that, Sameer Nayar quit his post at Moody's Investors Service to join CSFB's large-loan group as a director. Nayar will focus on structuring. He reports to Anand Gajjar, managing director in charge of structured finance and credit process for all real estate lending activity at CSFB.
Sources say that the ramping up by these dealers of their large units showcases the resurgence of this portion of the CMBS market. Large-loan transactions took a temporary nosedive as an aftermath of the 1998 Russian default and after Nomura Securities, which was largely identified with large-loan deals, left the mortgage market in 1999.
The volume picked up again in 2000 when dealers like Morgan Stanley, Banc of America, Goldman Sachs and Lehman Brothers started actively participating in this segment of the market.
Now dealers have to establish a presence in the large-loan arena or lose out on a big portion of the business.
Having a niche in this market "is important so that if a big developer comes through the door the dealer would have the capability of handling that, as opposed to possibly losing out on that business just because it doesn't have a dedicated large-loan group," said a rating agency source.
It is important to have a dedicated large loan unit because these loans are originated separately from conduit loans.
It's a growth strategy
The hiring of Nayar is part of CSFB's goal to grow all aspects of its CMBS business, including the large-loan segment.
"Whereas we have always been in the large loan business we expect to increase our presence and market share," said CSFB's Gajjar. "It is consistent with our plan to grow all of our market segments and market share throughout our real estate lending practices."
He said that though large-loan transactions may not be a high-margin business in and of itself but when combined with the ability to provide a complete array of lending products to the client, each with sufficient volume to have securitizations on a regular basis, it makes for a powerful platform.
Salomon is a different case, however. A rating agency source said that even though the bank has been doing very well acting as an underwriter and bookrunner on large-loan deals, SSB hasn't been strong on the loan origination front. "They are forming this new group so they could focus more on loan originations and become a player in this arena," said the source.
According to a real estate analyst, the more interesting question would be whether Salomon's entrance into this area is a signal that Citibank is going to become a more aggressive lender on a revolving credit basis to REITs and property companies especially in light of the fact that since the merger with Travelers, Salomon has been downsizing its exposure to real estate lending generally.
Salomon's Franzetti said it is all about matching distribution and origination capabilities.
"What we are trying to do is given our distribution capabilities on the fixed income, side we are really looking to basically expand our origination effort to match our distribution capabilities," said Salomon's Franzetti. "There is a real need to service our existing investment bank clients as well as our overall bank customers for some larger loans that historically we have not been necessarily active in."
He said the bank has a tremendous origination platform given all the customers in the Citigroup family "so we really expect that we'll have a fair number of opportunities to work with."
A higher margin business?
"It is potentially a higher margin business than conduit loans because of the many surfaces that a dealer can offer in structuring the loans and/or the resulting CMBS," said Michael Youngblood, managing director of real estate research at Banc of America.
However, in the large-loan business, one typically deals with higher quality borrowers compared to those in conduit transactions; most borrowing entities in a large-loan transaction are rated.
Furthermore, large-loan transactions typically have higher quality property compared to those in conduit deals. The strength of the borrower combined with the quality of the property tend to offset any incremental profitability in large-loan transactions; it's harder to charge more than conduit spread.
But there are incremental services that dealers may provide clients to make the transaction more profitable. These services include converting fixed-rate loans into floating-rate proceeds, allowing one to offer an interest rate swap, and those borrowing on a floating-rate basis may need one or more caps to limit the borrowing costs.
Aside from the incremental business that could be had, there is a fair amount of demand on the Street for these types of transactions.
"We are essentially seeing a fair number of small and midsized REITs as well as other higher quality real estate borrowers tapping into commercial mortgage borrowing," said Patrick Corcoran, a CMBS analyst at JPMorgan.
Corcoran said that higher quality borrowers in REITs can do the first piece of a loan as a securitizable commercial mortgage. Many small to midsize REIT borrowers have also been essentially strapped for cash or cut off from the public market ever since 1998. So as these borrowers turned away from corporate-style debt, the commercial mortgage market has given them a way to access capital.
"I think there is quite a number of groups chasing these borrowers," said Corcoran. "This is why you are seeing the guys on the Street refocus their attention to large-loan deals."