Riding the Refinancing Wave

December 14, 2017

Michael Gambro comments on the CMBS market, single-asset/single-borrower (SASB) transactions and the risk retention rules.

Excerpts from "Riding the Refinancing Wave," Structured Credit Investor, December 14, 2017:

Michael Gambro, co-chair of Cadwalader's capital markets group, cites rising interest rates as the main driver behind the high volume of SASB deals this year. "The assumption is that rates will continue to increase, so many property owners are seeking to refinance while rates remain relatively low. At the same time, investor appetite for floating-rate product has jumped."

Moody's calculates that in the first nine months of 2017, 33 risk retention-compliant CMBS were issued, of which 13 had horizontal strip structures, 12 had vertical strips and eight had L-shape pieces. Gambro notes that the implementation of risk retention rules at end-2016 appears not to have created an issue for the CMBS industry. "We haven't seen as much L-shaped risk retention as I expected; rather, I've been surprised by how much vertical execution there has been," he observes. "Banks have the capability to hold vertical strips and can execute them in a way that minimises retention costs."

Regarding concerns that CMBS volumes would be constrained under the risk retention requirements by a limited B-piece buyer base, Gambro indicates that there is plenty of B-piece capital available. "The target yields for CMBS risk retention funds are lower than in the case of individual B-piece investments and a number of new investors have entered the space this year. Any fears about diminished B-piece activity were overblown." For the moment, he describes activity in the CMBS market as "all systems go" - although he concedes that if a higher interest rate environment emerges, it will likely impact appetite for CRE lending. "There is the potential for the sector to move sideways, but I don't expect activity to slow down next year at least. Relaxation of risk retention is also a possibility, due to the recent Treasury report recommendations [SCI passim]," Gambro suggests.