One of the desirable features of a CRE CLO is the ability of the collateral manager to buy and sell loans at will or, going further, originate loans directly from the securitization structure itself. Although the economic merits of such a feature are emphatic, this feature was deliberately omitted from the one and only CRE CLO to honor the European market, and instead the Starz transaction consisted of a static portfolio of loans whose main product was applied to the reimbursement of the tickets. . The absence of this important and compelling feature has not gone unnoticed and questions have been raised in some quarters as to if and when we will see the arrival of CRE CLO backed by a dynamic loan pool. While conventional thinking infers that we’re somewhat off considering there’s only been the Starz CRE CLO deal to date, I’d suggest we could see this feature arriving sooner than late thanks to the inevitable demand for bridging funding and the abundance of transitional CRE.
Indeed, bridge financing is currently receiving increased attention, with a number of contributing factors. Chief among them is the fact that the loan origination market continues to be difficult and clearly demonstrates that it is not immune to market turmoil. Compared to the situation in recent years, there has been a marked increase in the cost of credit which can be attributed to market volatility, an increased level of uncertainty as well as the fact that some lenders are closing their loan portfolios until conditions improve. To add insult to injury, the exorbitant price of interest rate caps has added to these funding costs, and with it, borrowers are once again adopting interest rate swaps as a rate hedging strategy. of interest. Additionally, on the equity side, a combination of rising cap rates and looming concerns about a significant economic downturn negatively impacted real estate valuations, which in turn had a direct impact on the amount of debt a lender is willing to lend, but also the purchase price a seller may charge in any sale process.
The corollary of all these woes is that there is little incentive for borrowers to tie themselves to expensive term debt that is difficult to extricate themselves from without being burdened with prepayment penalties and potential closes in a trade. Bridge financing appears to be the ideal solution for borrowers who find themselves in the unenviable position of being forced to take on new debt while trying to ride out the current wave of volatility. Bridge financing also has the added benefit of giving borrowers the flexibility to reposition and stabilize transient assets, and thus allow them to qualify for a cheaper form of long-term debt. In this regard, there is no shortage of transitional properties and volumes are expected to grow further due to landlords adopting ESG best practices, repositioning properties post Covid fallout, eradicating voids at as tenants succumb to the macroeconomic crisis. stress as well as the repurposing of properties to meet ever-changing consumer habits and behaviors.
The inescapable fact is that bridge financing has a vital role to play in being able to provide borrowers with the space to execute their business plans and somehow avoid being burned by the market volatility. These raw facts will trickle down to proponents (like me) of CRE CLO technology; after all, it is transitional asset and bridging loan funding that has fueled the exponential growth of the US CRE CLO market. With the European market showing an abundant supply of bridging assets alongside what promises to be huge demand for bridge loans, there is no reason European CRE CLOs should not follow the same trajectory of growth than that of their American cousin. The ramifications of this could be huge; not only will the floodgates be opened for a significant volume of CRE CLO issuances, but the market will also witness an unprecedented level of product evolution as it is fine-tuned to cater to short-term lending, and with it a feature of basis will be the collateral manager’s ability to reinvest loan principal proceeds in the origination and purchase of new loans.
While market conditions have clearly created a bedrock of challenges, the fact is that these are paramount conditions for innovation to thrive and with that I suspect when the CRE CLO market takes off (which it will!! ), not only will bridge loans be an important part of this, but the presence of a dynamic pool of loans will become a pillar of the European CRE CLO.