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Monday, 08 January 2018

Rialto Keeps B-Piece Crown; KKR Tops Risk-Retention Ranking

Rialto Capital Management maintained its position as the most-active buyer of B-pieces from CMBS conduit transactions last year. It bought into 14 deals totaling $12.9 billion, or 27.2 percent of the year's issuance. But KKR Real Estate Credit Opportunity Partners was tops when it came to buying subordinate bonds subject to risk-retention rules.

Commercial Real Estate Direct Staff Report

Rialto Capital Management maintained its position as the most-active buyer of B-pieces from CMBS conduit transactions last year. It bought into 14 deals totaling $12.9 billion, or 27.2 percent of the year's issuance.

But only six of its investments were subject to the risk-retention rules that went into effect in late 2016. The rest of the deals it bought into had vertical risk-retention structures, where issuers retained 5 percent vertical slices of each.

KKR Real Estate Credit Opportunity Partners was just behind Rialto in the B-piece ranking, buying into 12 deals totaling $10.9 billion, or 23 percent of the year's conduit issuance.

But all its investments contributed to meeting the deals' risk-retention requirements. So it topped a ranking of B-piece buyers whose investments were subject to risk-retention rules.

Top Buyers of CMBS Conduit B-Pieces - 2017
2017 2016
Bpce Buyer #Deals Vol $mln Mkt Shr #Deals Vol $mln Mkt Shr%
Rialto Capital Advisors 14.00 12,925.69 27.24% 16.00 13,477.66 28.63%
KKR Real Estate Credit 12.00 10,897.52 22.97% 1.00 1,026.80 2.18%
Argentic Real Estate Finance 6.00 5,648.20 11.91% 0.00 0.00 0.00%
Prime Finance 5.00 4,810.78 10.14% 3.13 2,614.26 5.55%
Eightfold Real Estate Capital 4.65 4,640.49 9.78% 9.00 7,911.57 16.81%
LNR Securities 2.35 2,471.15 5.21% 3.29 2,946.88 6.26%
MassMutual 2.00 1,854.45 3.91% 0.00 0.00 0.00%
BlackRock Realty 1.00 977.09 2.06% 3.00 2,910.92 6.18%
NorthStar Real Estate Income Trust 1.00 958.99 2.02% 0.00 0.00 0.00%
Jefferies LoanCore 1.00 916.48 1.93% 1.00 890.68 1.89%
Resource Capital Corp. 1.00 705.38 1.49% 0.00 0.00 0.00%
C-III Capital Partners 1.00 637.56 1.34% 4.00 3,148.57 6.69%
Torchlight 0.00 0.00 0.00% 4.00 3,342.43 7.10%
Ellington 0.00 0.00 0.00% 3.60 2,682.26 5.70%
Och Ziff 0.00 0.00 0.00% 1.98 1,867.36 3.97%
Seer 0.00 0.00 0.00% 2.00 1,509.75 3.21%
Basis 0.00 0.00 0.00% 1.00 1,022.88 2.17%
World Class 0.00 0.00 0.00% 1.00 954.97 2.03%
Raith 0.00 0.00 0.00% 1.00 770.97 1.64%
  51.00 47,443.78   55.00 47,077.96  

                                                                   Source: Commercial Real Estate Direct

The rules were implemented with the idea that if issuers kept some of what they originate, they'd remained disciplined. They require that issuers keep a 5 percent slice - by face value - of their deals. However, they could sell off 5 percent of a deal's subordinate bonds - by market value. They also could blend both approaches, keeping a piece and selling another.

The buyer of a horizontal slice is restricted from leveraging, hedging or selling their investment for at least five years.

That makes the risk-retention ranking more significant. KKR effectively must retain, for at least five years, and likely for the deals' duration, the $947.1 million of bonds it bought. KKR last year had raised $1.1 billion of equity commitments for a fund, giving it the sort of long-term capital needed for its investments. Those were priced to yield from 14.15 percent to 18.25 percent, depending on how high up a deal's capital stack it went.

Buyers of CMBS Conduit Risk Retention - 2017
Investor # Deals Face Amt of Bonds Bought $Mln Mkt Shr%
KKR Real Estate Credit 12 947.06 36.14%
Argentic Real Estate Finance 5 515.22 19.66%
Rialto Capital Advisors 6 428.99 16.37%
MassMutual 2 188.83 7.21%
Prime Finance 2 169.82 6.48%
LNR Securities 1 112.03 4.27%
NorthStar Real Estate Income Trust 1 102.61 3.92%
Jefferies LoanCore 1 96.23 3.67%
Eightfold Real Estate Capital 2 59.88 2.28%
  32 2,620.67 100.00%

                                         Source: Commercial Real Estate Direct

Six of the deals the company invested in were structured with horizontal risk-retention slices, where KKR would buy roughly 10.5 percent, by par value, of deals' most subordinate bonds. The other six had hybrid structures, where both a horizontal and vertical slice were carved out to meet the risk-retention requirement. In those cases, KKR would buy 6.3 percent to 8.3 percent of a deal's most junior bonds, while its issuer would retain a vertical slice equal to 1.9 percent to 2.8 percent.

Well behind KKR in the conduit risk-retention ranking was Argentic Real Estate Finance, which invested in five deals totaling $515.2 million. All of its deals had horizontal risk-retention structures.

Comments? E-mail Orest Mandzy, or call him at (267) 327-4281.





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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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