Commercial Real Estate Direct Staff Report
The first CMBS deal backed by distressed real estate priced last Thursday at aggressive levels, which will likely result in other similar deals.
The transaction, Rialto Capital, 2012-LT1, provided Rialto Capital Management with $132 million of relatively low-cost financing for a portfolio of 320 loans and properties. It was comprised of a single class of bonds, rated BBB- by Fitch and Baa3 by Moody's that carried a coupon of 4.75 percent and an average life of 0.78 years. They were priced at 99.75 percent of par, providing a yield of 4.886 percent to investors that bought them.
Lenders that provide financing for buyers of distressed real estate and loans would generally require coupons that are substantially greater.
JPMorgan Securities and Wells Fargo Securities were joint bookrunners for the transaction.
The buzz is that the deal was over-subscribed. Investors were evidently comfortable in the ability of Rialto, a Miami investment manager that specializes in distressed real estate, to wring cash out of the collateral assets. In addition, the bonds that were offered represented such a small portion of the collateral's estimated value. And the transaction is structured as a liquidation trust, with proceeds of workouts and collateral dispositions initially going to pay down bonds. What's more, 91 percent of the collateral pool has some sort of recourse to their borrowers.
The assets that back the deal have a principal balance of $526.09 million and Rialto bought them for $224.15 million. It expects to recover roughly $350 million from them. So the bonds represent only 38 percent of expected recoveries. The thinking is that Rialto will generate $116 million from the portfolio in the first year and another $134.3 million in the second.
There's already talk that Rialto will come back to the till for additional financing. Given the investor interest in the initial deal, subsequent deals might be structured to generate a greater proportion of proceeds. And given the initial deal's success, other big players in the market for distressed real estate are sure to dip their toes in the structured finance waters as well.
Rialto has been among the more active investors in the distressed real estate market. The assets that secure the CMBS deal were acquired during the first half of 2011.
Since its founding in 2007, it has been involved in the acquisition of a total of $4.7 billion of commercial real estate assets. It participated in the purchase of more than $3.05 billion of assets from the FDIC and is managing $740 million of assets that Lennar Corp. acquired from three banks. It's also part of a team, led by AllianceBernstein, that is managing assets under the federal government's Public-Private Investment Program.
Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.
“The Weekly” is Commercial Real Estate Direct’s PDF newsletter, sent to subscribers every Friday morning. With over 100 news stories published on Commercial Real Estate Direct each week, “The Weekly” features the top stories in commercial real estate that industry participants need to know first. “The Weekly” also contains:
- Breaking mortgage, CMBS, and REIT news
- Quarterly league tables with rankings of B-piece buyers, book runners, and lenders
- Industry moves and changes in “The Insider“