Commercial Mortgage-Backed Securities: CRE-CLO Evolution

The CRE-CLO product is in its early years while conduit is showing its age.

August 22, 2019

This CMBS sector report is excerpted from the Third Quarter 2019 Fixed-Income Outlook.

Collateralized loan obligations backed by commercial real estate loans (CRE-CLO) in their current form was born in 2013. Up until 2018, the market was still figuring out what type of personality the product would have, or what its structural features would be. In the last year or so, the traits that have emerged are deals with two-year reinvestment terms, maximum pool-weighted average life (WAL) of 5.5 years, and highest concentrations in multifamily properties.

As the market is maturing for CRE-CLOs, we are seeing 2019 as a breakout year in terms of liquidity with more market-makers establishing themselves. For the majority of 2018, there were only three to four dealers making daily markets on the entire capital stack of select deals. Today, seven or eight dealers are actively making markets on a larger number of bonds, with an additional three to four regional dealers actively trading the product. Bid wanted in competition (BWIC) volumes have been steadily increasing, showing more signs of a healthy secondary market. While liquidity has improved, the deal structures are still undergoing a few growing pains. For example, a few recent deals have had their structure terms retroactively changed in deal documents after market consensus grew that this was the right course of action.

Increasing BWIC Volumes Indicate Secondary Market Strength

CRE-CLO Bid List Volume ($millions)

Bid-wanted-in-competition volumes have been steadily increasing, showing more signs of a healthy secondary market.

Increasing BWIC Volumes Indicate Secondary Market Strength

Source: Guggenheim Investments, JP Morgan. Data as of 6.30.2019.

Beyond these few growing pains, however, borrowers, issuers, and investors find CRE-CLOs attractive versus CMBS conduits due to their greater flexibility and shorter WAL. Conduit issuance has been declining slowly, and we expect that trend to continue as the product offering is not able to compete with insurance companies, banks, and CRE-CLOs. One of the main headwinds conduit financing faces is the borrower experience with conduit servicers. Borrowers need to go through servicers to release reserve funds, approve new tenants, and in times of stress, obtain modifications. It has been notoriously difficult for borrowers to get anything done with efficiency. In CRE-CLO structures, the issuer is intimately involved in these types of requests as they manage the loans and retain them on their balance sheet.

Conduit Issuance Wanes in the Face of Competition from CRE-CLOs

New Issuance ($billions)

Conduit issuance has been declining slowly and we expect that trend to continue as the product offering is not able to compete against with insurance companies, banks, and CRE-CLOs.

Conduit Issuance Wanes in the Face of Competition from CRE-CLOs

Source: Guggenheim Investments, JP Morgan. Data as of 6.30.2019.

As the CRE-CLO product continues to grow, we believe its structural advantages, along with the increased liquidity, will continue to make it an attractive investment.

—Shannon Erdmann, Director; Phil Hoehn, Vice President

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

©2019, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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