B-piece buyers will continue to enjoy a “healthier” level of interaction with CMBS originators than they did at the peak of the last cycle — as long as the level of competition remains in check, executives said during a panel discussion at the CRE Finance Council’s annual conference on June 9.
Buyers of the lowest rated or unrated classes of CMBS deals have rights allowing them to play an active role in making decisions impacting the value of the loan or the collateral. But the push-and-pull relationship ebbs and flows with the real estate cycle.
Right now these buyers are relying more on relationships with originators, as opposed to having to more aggressively “kick back” (or out, really) problem loans in order to agree on deals, panelists said.
That means working with issuers on structure, understanding their perspectives and shaping the loan pool “from the get-go.”
“In today’s market we work hard to give constructive feedback up front to originators,” said Joshua Cromer, managing director, Rialto Capital Management, one of four panelists on stage representing B-piece-buying firms. “The relationship is healthier than ever… we’ll suggest ways to restructure the loan rather than saying we’re going to kick out this loan because we don’t like the leverage on it.”
“It’s more of a partnership than it has been in the past,” another panelist added. “It does feel like issuers are thinking more about their brand and their execution in the marketplace… there’s more agreement in the room that we should show up with a good pool that will execute well in the market.”
But one panelist disputed that this was really the case after the session had ended.
“They are just sugar-coating this,” he said. “Everybody tries to work things out and find constructive approaches, but in the end if you’re going to filter out the worst loans they are hard decisions and many loans simply cannot be restructured because of fundamental flaws, and you have to be willing to stand your ground.”
“We kick out a lot more loans now because credit has deteriorated,” he said.
Only a handful of B-piece buyers make up a majority of the market, and many of them were up on stage at the CREFC panel. Last year, the four top B-piece buyers accounted for about 70 percent of the $60bn or so B-piece deals to hit the market. They are intent on keeping it that way.
“It’s nice to have a deal with a limited bidding pool,” said Richard Parkus, managing director with Seer Capital Management. “Then you can definitely have more flexibility on credit. Things are manageable at this point and we expect to be very active as long as credit and yields remain in this spot.”
Some investors are pulling out of certain deals or demanding higher spreads to compensate for credit quality concerns, but the interactions with originators is generally allowing the main players to actively shape and bid on most — if not all — deals.
Deals today get up to as many as six bids, whereas the number might have been half that at the peak of the last cycle. But that also makes the bidding process more complex.
“We’ve bid on every deal that’s been presented in the market this year,” one speaker said. But, he added, “Our credit meetings used to be half a day affairs. They are turning into several day affairs.”
Among major concerns, in addition to loosening credit and creeping leverage, speakers cited the growing prevalence of interest only loans — “it seems like IOs are a throw in to win a deal,” one executive said — and the number of originators in the CMBS market at-large.
Perhaps the biggest concern however is the potential for the emergence of additional B-piece buyers who could disturb the “healthy” relationship with originators.
“In a highly concentrated market things can get really exciting really quickly, and they can get really bad really quickly” one speaker said. “Adding a player or taking away a player can change things quickly. That’s what keeps me up at night: who is the new guy in the market and what will that do to pricing.
“One or two new guys can ruin the party.”