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Vertical to manage first CRE CDO

Bear Stearns this month will bring to market a $300 million commercial real estate CDO. The deal, Vertical CRE CDO 2006-1, will be the first CRE CDO managed by Banc of America subsidiary Vertical Capital, which has six deals in the market totaling $4 billion. The most recent offering was the Vertical ABS CDO 2006-1, which closed last month, according to Standard and Poor's.

Vertical, which industry veterans Brett Graham and Tom Pearce manage, is mulling the possibility of becoming a registered investment advisor once it completes its asset management business plan, Fitch Ratings said. The company has not co-invested in any of its CDOs to date.

The CRE CDO deal has a 55% bucket for large-loan CMBS, a 17% bucket for conduit CMBS, a 14% bucket each for structured finance real estate CDOs and B-note mezzanine securities and a 0.33% bucket for REIT debt. The deal has a 120 ramp-up period and a five-year revolving period; it matures April 2046. Wells Fargo Bank will act as trustee.

CDOs backed by commercial real estate continue to come to market thru first-time managers of the collateral - the sector in 2005 posted a year-over-year issuance gain of more than 100%. The rise comes at a time when CMBS performance is the best it's been in seven years (see related article p.15). Some of these newcomers are crossover managers from other CDO types searching for relative value and/or better performance prospects versus other asset classes. The others are real estate loan investors and mortgage REITs that are, for the first time, tapping the market in an effort to gain match term financing.

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