The second annual CREFC CRE CLO Conference, which took place last week, discussed the evolution of the CRE CLO market. Here are some additional takeaways from the conference, including sessions that were closed to the media and insight from a Kroll Bond Rating Agency (KBRA) report.
- It is important for the industry to be as constructive as possible in helping shape a sustainable CRE CLO market, as the current version of the product has not yet been tested in a recession, according to Victor Calanog, chief economist with Moody’s Analytics REIS. “[There is] continued interest in the [CRE CLO] vehicle as a means of financing transitional properties,” Calanog said. “Jury is still out on how CRE CLOs will fare in an economic downturn.”
- Advantages to CRE CLOs include more portfolio diversification and a different risk profile. Less flexibility was highlighted as a disadvantage.
- Managers continue to seek additional flexibility in their CRE CLOs with an eye toward being able to treat well-performing loans as if they were on their balance sheet. Several recent deals allow for "good news "modifications, such as loan coupon reductions and maturity date extensions subject to specific criteria. These modifications allow the loan to be kept in the pool for a longer period, according to a KBRA report.
- The commercial real estate lending industry needs to improve the quality of reporting post-issuance through standardization and transparency, conference participants said.
- Overall, current pricing does not reflect the different tiers of CRE CLO managers, or at least not as much as it should. However, some of the investor participants in the market noted they effectively tier managers by choosing whether to buy an issuer’s transaction.
- Finally, subordinate collateral is unlikely to be added as part of current CRE CLO pools due to pre-crisis history and investor pushback, according to industry sources.
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