CDOs Get a Second Chance
January 2, 2013
The collateralized debt obligation (CDO) may not have a great reputation, but it has an important strength: versatility. Unlike a conduit, which is designed to securitize loans with standard terms, a CDO lends itself to securitizing assets that are dissimilar. CDOs can also give managers discretion to move assets in and out of the pool of collateral — a handy feature when dealing with riskier loans.
Now that lenders are moving from making first-lien commercial mortgages to originating mezzanine and other kinds of unsecured debt, it’s only natural that they would look to CDOs to securitize these assets. In this month’s cover story, John Hintze looks at two recent deals from Redwood Trust and Arbor Realty Trust that could serve as a template for many others.
These structures might give you deja vu. Tad Philipp, director of commercial real estate research at Moody’s Investors Service, says they are “90% back to the playbook of peak of market,” as least in terms of structure, if not in terms of collateral credit quality. But don’t call them CDOs. They are commercial real estate collateralized loan obligations (CRE CLOs).
Others think it’s only a matter of time before we see even riskier colletar dropped into CDOs, such re-REMICs, which are deals securitizing the most subordinate tranches of other CMBS deals, known as B-pieces.
CRE CLOs aren’t the only deals in which investors are expanding into more complex and potentially riskier terrain. As John points out, Goldman Sachs recently completed a deal securitizing cash flows stemming mostly from billboard licenses in Times Square, and a few months ago J.P. Morgan completed the first of a couple of deals securitizing nonperforming commercial loans—not seen since before the financial crisis.
Nora Colomer looks at another example of a potentially riskier deal: commercial mortgage backed securities (CMBS) backed by a single, large loan. Securitization of very large commercial loans was a hallmark of the CMBS market before the financial crisis. At the time, overall deal sizes were so large that it was practical to include individual loans of several hundreds of millions of dollars in the mix. That’s no longer the case; conduit deal sizes have yet to return to pre-crisis levels. Instead, large loans are being securitized on their own. Despite the lack of diversification, yield-hungry investors have been snapping up such offerings, making it possible to finance these properties more cheaply than with insurance companies, their traditional lenders.
For her story, Carol Clouse talks to Scott D’Orsi of Feingold O’Keeffe Capital about another kind of CLO, deals backed by senior loans of noninvestment-grade companies. Issuance topped $50 billion in 2012, more or less quadrupling the previous year’s tally, and D’Orsi thinks it’s going to stay very robust; he wouldn’t be surprised if the recent pace of $7 billion or so a month continues through at least the first half of 2013.
In his final column for ASR, Bill Berliner has some parting thoughts on the current regulatory and policy environment and its impact on consumer mortgage rates and on the issuance of private-label mortgage backed securities. He concludes that Fannie Mae and Freddie Mac are not going anywhere soon, if only because there is nothing on the horizon to replace them.
On a similar note, Donna Borak from our sister publication, American Banker, looks at prospects for the Obama administration and Congress to tackle housing reform in 2013. This issue has languished for four years, yet policymakers do not appear to be in a rush to take on the future of Fannie and Freddie. Standing in the way are a mix of things: the political complexity of the issue, the government-sponsored enterprises’ recent positive economic performance and the incremental steps taken by federal regulators to restructure the mortgage market.