According to a recent report from Fitch Ratings, three main issues have characterized the collateralized debt obligation (CDO) market during the past year: record issuance, structuring innovations and headline meltdowns.
Â Â Â With all this activity and market turmoil, investors have been relying on the CDO asset manager to protect collateralized pools, the rating agency says. But because CDO issuance volumes have been high and growing, the market is also contending with new entrants in the CDO asset manager space – making overall surveillance all the more vital.
Â Â Â Fitch, whose CDO asset manager (CAM) rating and review program assesses different CDO asset managers by asset class, says today's market necessitates that managers meet and exceed industry standards.
Â Â Â According to the report, the rating agency "expects managers to present robust platforms that address the interests of both rated noteholders and equity holders."
Â Â Â "In doing so, Fitch places additional emphasis on the unique needs of each asset class," the company says. "Current standards will continue to be challenged by best-in-class managers who are anticipating and planning for the next innovation or market disruption."
Â Â Â As a point of reference to players in the CDO market, Fitch has identified commercial real estate (CRE) CDO manager strategies that comprise best practices in today's environment.
Â Â Â "As the number of large, actively managed CRE CDOs backed by CREL [commercial real estate loan] assets continues to grow, Fitch scrutinizes the asset manager's ability to source high-quality collateral to keep a CDO fully invested," the company says. "The high turnover of assets in CREL CDOs demands strong origination capabilities on the part of the manager."
Â Â Â The rating agency cites the performance of two companies – Arbor Realty Trust and Guggenheim Structured Real Estate – as examples of strong origination platforms at work.
Â Â Â For instance, Arbor Realty Trust has three CRE CDOs under management today, totaling more than $1.5 billion in assets. On the origination end, 80% of its borrowers are repeat clients, Fitch says. Moreover, the company's solid origination efforts are complemented by "sound and consistent underwriting and servicing standards."
Â Â Â Guggenheim Structured Real Estate, the rating agency notes, "targets experienced, well-capitalized sponsors with institutional-quality assets exhibiting positive cashflow."
Â Â Â According to Fitch, the servicer plays an "integral role" in the commercial mortgage-backed securities and CREL-assets market.
Â Â Â "Both the manager and servicer are engaged in the workout for defaulted loans, and Fitch will scrutinize the workout resources and capabilities inherent at each asset manager," the company says.
Â Â Â In this regard, Capmark Investments LP, for instance, "maintains a very active and ongoing monitoring access supported by regimented formal monthly and annual reviews of assets," Fitch adds.
Â Â Â "The company's surveillance process is facilitated by the ability to access performance data at the security, pool, loan and property levels, which is enhanced by its affiliates' servicing of many of the assets under management," the company remarks.
Â Â Â Fitch also points out that commercial real estate assets are unique and "transitional" in nature. Therefore, CRE CDO managers must keep the investor base apprised of "the developing business plans of each asset."
Â Â Â "This type of narrative reporting is highly customized and based on each unique asset or situation," according to the rating agency. "Quarterly narrative-based reporting is viewed favorably."
Â Â Â Fitch says Wachovia Bank NA's structured finance group, which provides nonrecourse, transitional and high-leverage capital to its CRE clients, "provides investors with asset summaries for each property that include key facts, figures and, most importantly, updates on the status of each loan held in the portfolio over the specified period."
Â Â Â "This type of detailed investor reporting, which extends beyond the trustee report, is a crucial service for CREL CDO investors," the rating agency notes.
Â Â Â Fitch analysts Manuel Arrive, Daniel Hicks, Lauren Keiper, Vincent Matsui, Alastair Sewell, Shashi Srikantan and Russ Thomas worked in concert to produce the report, "2007 Best Practices of CDO Asset Managers," which can be found at www.fitchratings.com.
Developers Invest In Seattle Project
Enterprise Community Investment Inc., a development capital provider with offices in Seattle, and Washington Mutual Community Development Corp. have agreed to a $15.5 million new markets tax credit transaction that will help finance construction of the 17th & Jackson project, a six-story mixed-use building in Seattle's Central Area neighborhood.
Â Â Â According to Enterprise, the building will consist of 59 apartment units, 11,000 square feet of retail, office and live/work space and a 62-stall parking garage. The sponsor and developer of the project is the Central Area Development Association, a community development organization dedicated to the revitalization of the Central Area neighborhood
Â Â Â "The 17th & Jackson project is a strategic investment that uses new markets tax credits to create subsidized housing that is affordable to working families earning 70 to 80 percent of the area median income," says Joe Wesolowski, senior vice president at Enterprise.
Â Â Â "By spurring additional residential and economic development and creating jobs, 17th & Jackson contributes to a number of important goals in the Central Area neighborhood as well as the city of Seattle's priorities for creating workforce housing," he adds.
Colorado Bank Forms Capital Markets Group
Colorado Business Bank, based in Denver, has developed a real estate capital markets group intended to diversify and strengthen the bank's commercial real estate banking platform.
Â Â Â Led by executive vice president Craig Poulter and senior vice president Kathy Thurston, the group will create a comprehensive capital markets product offering – to include mezzanine debt and other financings – and establish a loan syndications desk, according to the company.
Â Â Â "All of the activities of the real estate capital markets group will support, complement and build upon the strong real estate banking reputation we have already established in both our Colorado and Arizona markets," says Jon Lorenz, CEO of Colorado Business Bank.
Â Â Â Poulter and Thurston have a combined 40 years of experience in real estate banking and real estate transactions. They have arranged construction financing for a number of major Denver-area projects, including the final phase of Clayton Lane in Cherry Creek and the recently commenced redevelopment of Southglenn Mall.
FL: MELBOURNE PROFESSIONAL COMPLEX, MELBOURNE
WHAT: Constructed in 1986, the property is located on 5.33 acres of land and contains 64,800 square feet of net rentable area, as well as 288 parking spaces. Melbourne Professional Complex is currently 95% occupied, with tenants' lease terms ranging from three to five years.
Â Â Â Â WHO: James F. Perry & Co., a Miami-based mortgage banking organization, arranged the financing for the borrower, Sand Point LLC.
Â Â Â Â $$$: $4.95 million.
Â Â Â Â TERMS: The loan was set for a term of 10 years at an interest rate of 5.85%. A 30-year amortization period follows a two-year interest-only term.
Â Â Â Â James F. Perry & Co.: (305) 670-8008.
CT: 340 PUTNAM ST., BRIDGEPORT
WHAT: This 18-unit, three-story concrete apartment building was built in 1991.
Â Â Â Â WHO: Houlihan-Parnes/iCap Realty Advisors, a White Plains, N.Y.-headquartered real estate investment firm, placed the financing for a Stamford, Conn.-based buyer to purchase the building for a total of $1.25 million.
Â Â Â Â $$$: $875,000.
Â Â Â Â TERMS: The loan, which carries a 30-year amortization schedule, features a fixed interest rate of 6.15% for the first 10 years.
Â Â Â Â Houlihan-Parnes/iCap Realty Advisors: (914) 694-6070.