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RBS: CRE CDO loans make a comeback

The new issue market has potentially reopened with four commercial real estate loans tied to collateralized debt obligations — secured primarily by commercial real estate whole loans on transitional properties — issued in the fourth quarter of 2012, totaling $1 billion.

The four portfolio loans included Arbor Realty Trust (ARB), NorthStar Realty Finance (NRF), Prima Mortgage Capital and Redwood Trust (RWT), according to the Royal Bank of Scotland (RBS).

Click on the graph to view the summary of recently issued CRE CDOs.


Redwood issued a $291 million floating rate commercial mortgage-backed securitization deal – titled RCMC 2012-CREL 1 – in November secured by a portfolio of 30 mezzanine loans.

The firm sold the senior 59% of the capital structure while retaining the most junior 41% of the capital structure.

These types of transactions fill an important void in commercial real estate finance with nearly 40,217 CMBS loans accounting for $471 billion maturing without extension options between now and 2017.

"Given the increased demand for CRE CDOs 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 considering issuance," CMBS analysts Richard Hill and Joseph Ruszkowski with RBS said.

Thus, the new issue CREL CDO market could be "the next frontier," possibly increasing to between $5 billion and $10 billion throughout the year. This is in comparison to $5 billion of CMBS 2.0 issuance and $12 billion in CLO 2.0 issuance in 2010 and 2011, respectively.

There are several structural differences between recently issued CREL CDOs and legacy CRE CDOs that investors should consider, including the ramp-up period, reinvestment period and credit enhancement.

Traditionally, CREL CDOs were actively managed, providing the manager the ability to reinvest proceeds for typically five to six years and trade a portion, typically no more than 10% of the loans, the report noted.

"However, the recently issued deals have been static or reduced the reinvestment period to two years as well as more robust credit enhancement," the analysts said.

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