NorthStar Realty Finance Corp. has priced its first collateralized debt obligation (CDO) backed by commercial real estate of 2013.
Only it’s not calling the transaction a CDO, a label that has been tarnished by its role in the financial crisis.
Instead, a press release published Friday says the company is issuing $531 million of floating-rate commercial mortgage backed securities.
But the structure of the deal is not a static conduit, but a collateralized loan obligation which allows for active management or riskier collateral. NorthStar will contribute senior participations of originated commercial real estate loans, including an interest in the leasehold mortgage on the Milford Plaza hotel.
Moody’s Investors Service, which rated the deal, cites as a risk factor the low diversity in the number of collateral names and the fact that none of the collateral is publicly rated; instead the debt has credit assessments. The pool consist of high loan-to-value collateral with a majority of collateral credit assessed below investment grade.
Another factor setting the deal apart from a typical CMBS is that NorthStar has yet to acquire all of the collateral; there is a six-month ramp up period. It will initially be collateralized by $425.2 million of commercial real estate loans; with the flexibility to contribute up to $106.3 million of additional commercial real estate loans within six months of closing.
The transaction priced at a weighted average coupon of LIBOR plus 268 basis points.
A total of $382.7 million of investment grade bonds will be issued, representing an advance rate of approximately 72%. The transaction is expected to close by the end of August.
NorthStar expects to earn a yield of approximately 13% on its retained Interests, inclusive of fees and estimated transaction expenses. It will retain an aggregate 35% ownership interest in the Milford Plaza hotel and retail component of the hotel.