The nascent market for collateralized debt obligations using subordinate and mezzanine real estate collateral is expected to pick up in the coming months. So much so, that Fitch Ratings has come out with methodology for rating these types of transactions and analysts there say it is reviewing proposed transactions.
"We've been getting a lot of inquiries from several players out there," said John Malysa, managing director in the CDO group at Fitch in New York, explaining why the rating agency has come out with formalized methodology now. To date, just two such deals have been brought to market, the most recent being Wachovia Securities' Brascan transaction, which was recently priced.
Malysa said interest in revolving CDOs that use subordinate or mezzanine real estate collateral is picking up because the CDO market provides a financing method for issuers. And for managers, meanwhile, these riskier loans offer yield in a tight-spread market. "We expect all these funds that have been set up, their objective is to go out and find these high yielding assets," he said of CDO managers.
To rate the transactions, Fitch will employ a joint effort on behalf of its credit products and commercial mortgage-backed securities group, Malysa said.