BlackRock Financial Management's Anthracite Europe 2006-1, the first commercial real estate (CRE) CDO, backed by CMBS, B/C loan notes and other real estate debt priced last week. Dealers expect more CRE CDO transactions to emerge, providing exposure to diversified real estate risk (ASR, 11/20/06).

"With no direct comparables, spread performance is difficult to assess," Commerzbank said. "However, the asset class' novelty value and Blackrock's pristine reputation (enhanced by its access to Merrill's real estate assets) seem to have enabled competitive pricing. Indeed, although triple-A spreads were relatively aligned with recent CDOs of ABS, spreads lower down the capital structure came inside Collineo's CDO of high-grade ABS."

The deal, via Anthracite Euro CRE CDO, involved the sale of 263.5 million ($341.8 million) of Anthracite Capital debt, which is managed by BlackRock. A subsidiary of Anthracite will take on all of the subordinated notes in the capital structure. The 142.5 million in triple-A notes priced at 27 basis points over Euribor, which was tighter than earlier market talk of about 30 basis points, suggesting strong investor demand. The 25 million of the lowest rated double-B notes priced at 275 basis points over Euribor, which compares with average spreads for double-B rated CMBS tranches of 300 to 375 basis points that it is exposed to the first loss.

"Clearing spreads of Anthracite Europe 2006-1 evidences how technicals continue to far outweigh fundamentals in structured product pricing," Deutsche Bank analysts said. "The senior and mezzanine tranches came moderately cheaper to leveraged loan CDOs and CMBS but the junior bonds - particularly the BB' tranche, which was reportedly preplaced - priced inside of the cash CDO market. More notably, the junior bonds came tighter to subordinated CMBS, which makes up a portion of the CDO collateral."

With such attractive returns, the success of the deal is likely to encourage other issuers to follow suit. CRE CDOs are a well-established asset class in the U.S., but have not previously appeared in Europe because of a limited supply of the kind of assets used to back the deals, particularly the B-notes. But the search for relatively high-yielding assets has allowed more and more of the risk involved in lending to be transferred to investors that are eager for yield.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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