Commercial real estate collateralized debt obligations could look a lot more like commercial mortgage-backed securitizations in the coming months as liquidity concerns continue to spread and structures become simpler. More sequential payoffs, smaller reinvestment buckets and less interest coverage/overcollateralization testing are some of the structural changes that are to be expected, Moody’s Investors Service analysts said in a report.
CRE CDO managers and traders generally do not think the need to resort to back-to-basic structural changes is necessarily warranted. “Some of the bonds may not have had the most conservative underwriting, but even if delinquencies double or triple they are still less than 1%. And I think people are missing that point,” said one back CRE CDO trader who expects reinvestment buckets to shrink to around 10% from the currently common 35%. “There are also a lot people who were playing in ABX on crossing over into CMBS and shorting the index based on negative views, which may or may not be shared by everybody.”
Lack of confidence in the ratings agencies is helping drive CRE illiquidity despite the higher asset quality of commercial mortgages. “CIOs are saying ‘I don’t care what you tell me ratings agencies, I trusted you in residential and I really got burned,’” said a CRE CDO manager. “Everyone thought the industry was policing itself. Now they just shoot down anything structured.”
Collateral type will be taking a more conservative turn as well, according to Moody’s analysts, who expect below-investment grade notes to give way to the inclusion of more whole loans down the road.