CMBS-backed CDO issuance could exceed $15 billion this year, up from $8 billion in 2004, according to Moody's Investors Service. While deal sizes historically have been small relative to collateralized mortgage-backed securities, at $300 million to $500 million, larger deals - exceeding $1 billion - are in the pipeline, according to Tad Philipp, a managing director at Moody's.
"Both the pace and size of deals are ramping up rapidly," Philipp said, pointing out that a $1 billion deal could reference $2 billion to $3 billion of loans. "It's far more important to the industry than the size of its issuance might indicate," he said.
Commercial real estate CDOs have "become the preferred balance sheet financing mechanism for many of those who finance capital markets real estate debt," Moody's analysts wrote in a recent report. The analysts cite the ability to provide matched-term funding consistent with the underlying loan portfolio - meaning real estate finance companies are not locked into financing long and borrowing short - as a major advantage to using the structure.
Commercial real estate collateral and structures have evolved this year from static pools of CMBS and whole loans to revolving pools of numerous commercial real estate-related assets, including synthetics and condo-conversion loans, according to Moody's. Particularly with synthetics, the rating agency said there "has been a lot of interest expressed and many questions about how we would look at these." So far, the largest synthetic concentration in a CRE CDO rated by Moody's was 5%, but the agency is expecting deals with higher portions, as well as entirely synthetic deals.
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