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The Rise Of CDOs

Commercial real estate collateralized debt obligations (CRE CDOs) hit the big time in 2006, growing to a $34.3 billion business — a whopping 62 increase over 2005 and more than four times the volume of issuances in 2004. This year, the market may nearly double again, according to Robert Ricci, managing director for Wachovia Securities, who predicts volume may reach $60 billion.

CDOs are a more flexible version of CMBS, which borrowers have grown exceedingly comfortable with in the past decade. The key difference is that issuers have the option to actively manage the pool of assets inside CRE CDOs. They can cycle loans in and out, change property types and change geographic distribution (all within limits, of course). Also, issuers are not limited to fixed-rate mortgages. CDOs can include floating rate debt of all stripes. Managed pools can also include REIT and REOC debt, mezzanine financing, preferred equity and other derivatives.

From a sponsor standpoint, CRE CDOs seem to be an attractive option. Because the pools are actively managed, sponsors can charge higher fees — as high as 45 basis points compared with 20 basis points for CMBS.

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