Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 15

Understanding Managed CRE CDOs

Brian P. Lancaster

Senior Analyst

Wachovia Capital Markets, LLC

Anthony G. Butler, CFA

Senior CMBS Analyst

Wachovia Capital Markets, LLC

Greg Laughton

Analyst

Wachovia Capital Markets, LLC

The nature of commercial real estate collateralized debt obligations (CRE CDOs) has changed significantly since their introduction in 1999. CRE CDOs were typically static transactions consisting primarily of fixed-rate collateral, specifically unsecured real estate investment trust (REIT) debt and conduit commercial mortgage backed securities (CMBS) bonds. These static deals allowed for the sale of collateral only for credit reasons (e.g., delinquency triggers, downgrades, and defaults). The ongoing involvement of the collateral manager was strictly limited to credit surveillance. Any return of principal during the life of the transaction was used to pay down issued liabilities in a straight sequential fashion.

In 2004, an entirely new type of CRE CDO was introduced and proliferated. Key features of these “managed” CDOs include the ability of the collateral manager to reinvest principal proceeds for a period of time, trade collateral assets for other than credit reasons, and include non-CUSIPed assets such as B-notes, rake bonds, mezzanine loans, and preferred equity. CDO technology has been applied to achieve new financing solutions. Just as the first generation of static CRE CDOs emerged in response to the permanent financing needs of CMBS B-piece buyers ...