Pool of buyers for riskiest CMBS slices grows

By Adam Tempkin

NEW YORK, June 11 (IFR) - There is a growing supply of purchasers for the riskiest slices of CMBS deals and as competition heats up, underwriting is deteriorating in the once-again booming commercial mortgage bond market, according to panelists speaking Tuesday at the annual conference of the Commercial Real Estate Finance Council (CREFC).

There were standing-room only crowds for every session at the trade group's annual New York conference at the Marriott Marquis hotel in Manhattan.

Members of the group, which represents all facets of the CMBS and commercial real estate markets, were excited at the renaissance of the US CMBS market, which may exceed US$75bn in 2013 after seizing up in 2008 after the financial crisis. Approximately US$56bn was issued in 2012.

So-called B-piece buyers, who purchase the bottom-most and riskiest level of the capital stack, historically garnered the highest returns and took on the most risk in CMBS deals. They were therefore awarded great control over each transaction and the loans in it.

But what used to be a small club of B-piece players has mushroomed into a much larger group as so-called fast money players, or hedge funds, are putting in bids for recent CMBS deals.

"B pieces are the high yield bonds of the CMBS market," said one panelist who worked for a new entrant in the B-piece space. "With all of these new players and competition heating up, the market is not as stable as it was."

At least eight mainstay industry players bought the B-pieces of one deal over the last year, while three to four new entrants participated in recent deals. At least seven other players are bidding on B pieces of CMBS deals in an attempt to get into a hot market.

Along with increased competition and an expanded pool of B-piece buyers, leverage has crept up and underwriting has declined in recent deals, panelists said.

Industry participants at the conference questioned whether hedge funds were getting into the business simply as a "trade" to make quick money, or whether there was a sense of dedication that means that some buyers would hold the B-pieces in their portfolios to term.

While several hedge fund managers said that they are dedicated long-term to the sector, one prominent asset manager said that his company's decision to play in the market is a "relative value" assessment.

"We don't have anything necessarily earmarked for the B piece market," he told an audience of hundreds.

"But if we see something we like, we kill it and eat it."

In other words, he said, "trade" might not be appropriate word for his company's strategy in the B-piece sector.

"It's a relative value decision as to whether we're in or out."

One asset manager who is a B-piece buyer said that while credit is loosening, "it's not that bad", and the real problem is "a simple supply and demand" issue.

With at least 17 B-piece bidders now in the market competing for a relatively limited number of deals, B-piece yields are going to continue to compress and underwriting might suffer, as newer entrants might be more reluctant to "kick out" a faulty loan from a securitized pool.

"That being said, considering the great cost and total work that it takes to competently manage a CMBS B-piece portfolio, getting into the business is just not cheap enough to be just a 'trade'," said one hedge fund manager. "This is only a business for us, not a trade."