RBS is banking on the rebirth of commercial real estate CDOs.
Four deals totaling $1 billion were issued in the fourth quarter of 2012, and the investment bank expects to see another $5 billion and $10 billion hit the market in 2013.
That might not sound like much, in light of the $65 billion issued at the peak of the CREL CDO market in 2006. But it's a strong start. By comparison, when the market for CMBS re-opened in 2010, just $5 billion were issued, and when the market for CLOs reopened in 2011, issuance reached just $12 billion.
“Given the increased demand for CREL CDO’s in the secondary market over the past couple of years, it’s long been thought that the primary market may re-open, with several experienced CREL CDO managers as well as a few new entrants,” RBS analysts said in research published Wednesday.
“This appears to have finally occurred, with the asset class potentially filling an important void in commercial real estate finance,” it continued. The report noted that nearly $500 billion of loans are expected to mature over the next five years without extension options.
Not all of the fourth-quarter 2012 deals RBS identified as CREL CDOs were labeled as such. The issuers used a variety of structures, ranging from traditional CRE CDOs to CLOs to CMBS. Nevertheless, RBS said, all served the same purpose. “Make no mistake about it, each of the recently issued deals are akin to the CRE CDOs issued before the financial crisis,” it said.
Or, as a subheadine of the report put it, “If It Looks Like a Duck and Quacks Like a Duck, it’s Probably a Duck...”
So how do CREL CDOs quack? RBS noted that the product evolved as an alternative to CMBS for loans that did not fit neatly into the standardized CMBS structure, either because the didn’t have lock-out periods, didn’t require reserves or included a future funding component. “Specialty finance companies used these structures to finance their loan originations without mark-to-market implications,” it noted.