By Todd McNeill
The balance of power is moving around the CMBS playing field in 2015, and loan originators seem to find themselves with the smallest hammer. Conversely, the B Piece buyer has a newfound hammer that seems to be bigger than all. The Rating Agencies are coming in right behind the B Piece buyers as the second biggest bully on the block.
Since early January 2015 the B Piece, or the sub-investment grade portion of a CMBS Securitization, has seen yields increase over 100bps from 2014, driving down the price of the B Piece. More importantly, the B Piece buyers have exercised their power to reject collateral loans they don’t like. Said differently, the B Piece buyers are “kicking” loans out of the pool and putting them back to the Originators. Industry experts have stated that the power now rests solely with the B buyers these days with no guess as to when the power may shift again.
Most calculations indicate that in late 2014 the B Piece yield was in the 14% to 15% range. Currently the same B Piece is now trading at a yield of 15% to 16% range. This drop in prices signals a strong investor (i.e. B Piece buyers) caution about credit quality along with a reduction in the amount of B buyers active in the market. Most of the recent conduit securitizations average about 70 loans in the pool. In 2014 the average number of loans “kicked” from a pool was around one or two. That number has more than doubled with an average of two to five loans being “kicked” from the last several pools.
Why is this important to mortgage bankers and borrowers alike? Because everyone understands Wall Street only jumps in a game where money can be made on the trade. Thus, if a CMBS shop feels like a loan may be “kicked” from a pool, they will not close the loan and leave the borrower at the altar, simply referring to their actions as “just business”. Make no mistake about it: most CMBS shops are running the deals past the B buyers first to ensure that the loan structures outlined in the loan applications will be acceptable and purchased if the CMBS shop closes the loan. However, it is important to communicate with the origination shop and ask the questions regarding both B Piece buyer and rating agencies as it relates to your loan to ensure that you do not get a surprise after spending several thousand dollars in pursuit costs.
In 2014 during the most recent peak, there were approximately 17 firms actively bidding and buying B Pieces. While several firms left in the industry, the amount of B Piece buyers that actively bid transactions has shrunk with some firms sitting on the sidelines waiting for better quality and higher yields. It appears this day is now approaching. One of these firms, Eightfold, recently jumped back in and won the B Piece bid on two transactions after sitting on the sidelines.
In 2014 the top 5 B Piece buyers were:
- Rialto Capital (27.2% market share – 3rd time in 4 years ranked #1)
- Seer Capital (19.2% market share)
- Ellington Management (12% market share)
- LNR (11.2% market share)
- DoubleLine Capital (6.8% market share)
CBRE Capital, Parella Weinberg, Saba Capital and Square Mile Capital all purchased B Pieces in 2013 and chose to sit on the sidelines in 2014 with zero purchases.
A new entrant, KKR, just launched a debt-investment platform and seems to figure into the B Piece market heavily going forward after assembling a veteran team.
If you plan on sourcing a CMBS loan, it is important to know that your mortgage banker has excellent rapport with multiple CMBS shops and has a good understanding of how the winds are blowing along the CMBS landscape to help avoid costly mistakes. In a recent exercise MCA was able to secure a loan application for a CMBS loan placement in Midland, Texas, by going with a CMBS shop that has B Piece purchasing capabilities and signed off on the loan structures before even providing the loan application. There were several other CMBS shops that did not even quote the deal due to perceptions in the “oil patch”. Not surprising, the CMBS shops that passed on the opportunity did not have in-house B Piece capabilities and were gun-shy of quoting for fear of the B Buyer. Relationships such as these can prove invaluable to borrowers that desire certainty of execution in a system that can change on one piece of news rippling through the market.
The markets are indeed efficient, and buyers are sending a strong signal to the CMBS shops to tighten their underwriting standards and to pay attention. This discipline, while frustrating for borrowers and mortgage brokers, will help avoid another bubble and crash in the securitized machine, which will ultimately prove to be a good thing for everyone.
For further information on how Metropolitan Capital Advisors can help you underwrite and understand your various CMBS options, contact Todd McNeill at TMcneill@metcapital.com or visit our website at www.metcapital.com.