CRE CDO: Booming market
by Brian Lancaster, managing director, head of structured products research at Wachovia Capital Markets.
The CRE CDO market is booming. Born in 1999 in the wake of the Russian default crisis as a more stable way to finance high yield, subordinate, CMBS securities (so-called "Cusiped" collateral), the market experienced solid but unspectacular growth until the introduction in 2004 of the managed CRE CDO. Driven by its flexible, managed structure – which permits the securitization of a wide range of non-Cusiped commercial real estate loans (CREL), such as B-notes, mezzanine debt, whole loans, credit tenant leases and even construction loans – CRE CDO issuance doubled in 2005 and nearly doubled again to $37 billion in 2006. Last year also saw the first euro-denominated CRE CDO.
Another $50 billion to $60 billion is expected in this year as bespoke and widely distributed synthetic deals, which dominate the majority of non-CRE CDOs, come to the fore. Synthetic deals can be used to arbitrage the CMBS or CDS on CMBS capital stack from AAAs on down or, as in the corporate synthetic CDO market, transfer on-balance sheet commercial real estate risk for capital relief or diversification.
With the first insurance company-managed CRE CDO issued last year, as well as the first commercial bank balance sheet synthetic CRE CDO, both greater than $1 billion, expect deal size and managers to become much larger.