Some investors have started to turn to commercial real estate deals to mend their collateralized loan obligation's real estate woes. The announcement of the Equity Office Properties Trust deal the largest leveraged buyout in history -- and a sprinkling of other deals in the market are providing supply and drawing attention. "More CLOs need exposure to real estate," said one portfolio manager. "And the commercial market is not slowing down" like the residential market did, he explained.
For that reason, some investors are considering turning to deals like CB Richard Ellis and Tishman Speyer Real Estate despite modest spreads. "At first we passed on them because of the low spread," the portfolio manager said. But now he is taking a second look because they may be the missing piece his CLO is looking for and they have been received well by the market. "They were both very well rated and the [CB Richard] Ellis deal is full at 175," he said, in regards to commitments that had already been made to the bank loan. Moody's Investors Service rated the Tishman credit Ba2 and Standard & Poor's affirmed CBRE's BB+ credit rating. Both deals are funding acquisitions by the companies. CBRE is acquiring real estate services company Trammell Crow for approximately $2.2 billion. Tishman Speyer will use the financing for its purchase of a portfolio of Washington, D.C. area office assets from The Blackstone Group. The exact transaction price could not be determined.
The CBRE deal hit the market Nov. 15 and the term loan "B" was already oversubscribed last Tuesday, an investor said. Led by Credit Suisse, the $2.2 billion deal consists of a five-year, $1.2 billion tranche "A" and a seven-year, $1 billion term loan "B." Pricing is LIBOR plus 1 3/4% on the term loans, according to a banker. Tishman Speyer's $545 million deal was also doing well, said an investor. Syndication for that credit also launched Nov. 15 and consists of a $175 million revolver and a $370 million term loan "B." Led by Wachovia and Merrill Lynch, it is priced similarly to the CBRE deal, with the revolver at LIBOR plus 1 3/4% and talk on the term loan "B" in the range of LIBOR plus 1 3/4-2%.
This interest in commercial real estate could bode well for the newest mega-buyout, Equity Office Properties. The company announced last week that it agreed to be acquired by Blackstone Real Estate Partners for approximately $35 billion. Goldman Sachs, Bank of America and Bear Stearns have signed on to do the financing, and a banker said that the deal will probably be financed through commercial mortgage-backed securities. Even though the deal's structure has not been confirmed, many market players felt there would be room for it in the loan market. "It's going to end up every where," said another portfolio manager. "You're financing long-term assets with short-term debt," he said about one of the downfalls of funding the acquisition through the loan market. "It would seem to me this is more of a bond deal, but I suspect there will be room for everyone to play. It's a big sandbox," he said, implying there will be room for a number of different market players to jump in.