Hitting the market with a larger deal than previously expected, Warburg Dillon Read LLC will be issuing its inaugural commercial mortgage-backed securities conduit for approximately $1.5 billion in late March, partnering with either Lehman Brothers Inc., Morgan Stanley Dean Witter, or Salomon Smith Barney, according to company officials.

The choice of partner was to be announced by the end of last week, but officials at Warburg would not disclose the identity of the company at press time.

"We'd like to get down to [Naples] Florida to this conference with a partner," said Brian Harris, executive director of principal finance and credit arbitrage at Warburg, referring to this weekend's Winter Buy-Side CMBS Forum taking place in Naples, Fla. "Today or tomorrow we are going to identify this partner that we're going to do our first conduit deal with. We're still waiting on some final collateral runs before making the announcement," he stated last Thursday.

The cut-off date for the collateral will be Feb. 10, and the deal will be launched in March. Warburg will be contributing $1.1 billion to $1.2 billion to the conduit deal, and the chosen partner for the transaction is slated to contribute between $400 million and $500 million.

The collateral for the forthcoming deal will be comprised of approximately 1% hotel and 1% nursing home or healthcare collateral. There will be a large retail component, Harris said, but most of it will be investment-grade because of the large-loan transactions that the company has done.

Additionally, some of the collateral going into the conduit are the A-class bonds off of an A/B structure.

"We did two rather large transactions, one that was a $175 million loan on the Cherry Creek Mall in Denver and another loan for $375 million to Westfield of America," Harris added. "We're going to do [Rule] 144A privates on those, and we've pretty much got the junior pieces sold, and we're going to contribute the triple-A and double-A bonds to the conduit deal."

Moreover, Warburg is currently working on a $500 million loan that Harris would not identify.

Making A Name For Itself

Warburg's foray into the CMBS market is being choreographed in conjunction with a well thought-out expansion of commercial product lines and CMBS staff.

The company is now in the process of hiring 10 more CMBS experts in an attempt to make a name for itself in the commercial sector. Warburg began recruiting real estate talent and started building a CMBS roster following the market meltdown of 1998, when it appeared that barriers to enter CMBS were lowered because of global market volatility and decreased competition. The department now has 25 full-time members.

In addition, new product lines have been opened, including floating-rate deals, mezzanine loans which have been approved, distressed debt and construction take-out loans, Harris said.

"We're a new name but we're not inexperienced people," Harris said. "We have been well received from the clients we've spoken to and the B-piece guys we've spoken to. We're going to be leading the way to larger deals for 2000."

Raising the Stakes for CMBS 2000

Warburg's transaction seems to foreshadow a year for CMBS that will be characterized by bigger players and bigger deals.

"We're not going to be doing $800 million deals, that's not the way we think this market should go," Harris said. "As a result of that, we're able to do transactions up to $60 million in the conduit, without concentration risks. There are going to be bigger deals this year, and we plan on being very much involved in it."

The company is most competitive in the north-of-$20 million loan range, which has had rather thin originations lately. "We can compete on the lower levels, but to me, it's just not worth it," Harris noted. "That's a scramble down there." Warburg wrote a $200 million loan in December and plans to write another $200 million loan in January.

More importantly than anything else, Harris feels that the timing is right for its deal, as the CMBS market is considered healthier than ever and a fair amount of supply is being readied in the pipeline.

"Spreads are in good shape and there is good demand in the market," Harris added. "We're on the map, there are lots of inquiries going on now and we understand the spreads. We are offering other product types, which is making us more attractive, but almost everything is being done as an incubator towards the conduit."

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