CMBS loans are likely to be an increasingly common feature in CLOs in the future. In November, Moody’s Investors Service released a presale for a $172 million deal called RCMC 2012 CREL1 from Redwood Trust’s subsidiary called Redwood Commercial Mortgage Corp.
This is a securitization of a pool of mezzanine and preferred equity loans, which are all high-grade assets off of recent CMBS transactions.
The transaction's 30 loans finance large properties including the Plaza Mexico retail center in Lynwood, Calif., the 55 West Monroe office building in Chicago and New York City's Gansevoort Park Avenue hotel.
The loans are supported by the borrower's equity instead of the property itself. Moody's rated the issue ‘Baa3’, but said in the presale that the structure is supported by mitigating factors, such as a diversity of assets and what it said was a low loan-to-value ratio.
According to one source familiar with the deal, pricing on the Redwood deal pulled in by 30 basis points and was oversold.
Derek Meherik, a vice president at Moody’s, said that three months ago the market also saw a transaction called Arbor CRE CLO 2012, which was a pool of multifamily whole loans that sparked a lot of interest in creating deals backed by pools of direct real estate interest.
Another similar sector is CLOs of CMBS I/O transactions. Meherik said that Moody’s has issued ratings on four of these deals. There is also continued interest in the segment because CMBS 1.0 I/Os have performed well.
Meherik explained that in a CMBS transactions, loans are typically made at a higher coupon than the bonds; that creates an interest only strip that represent the profit of the issuer. The CLOs of I/Os allow issuers to securitize the interest strip and turn it into principal.
“In some other sectors, the interest is used as part of the deal's enhancement or the issuer keeps it, but in CMBS these strips are marketed and now they are supporting principalfrom CLO deals as well,” he said.