Earlier this spring, Kroll Bond Rating Agency assigned preliminary ratings to a commercial real estate “collateralized loan obligation,” or CLO, that LoanCore Capital Markets was taking to the market.
The CLO was backed by $1.1 billion in first mortgages secured by a mix of 33 properties. The portfolio consisted of multifamily, office, mixed-use, industrial, hospitality and retail assets. This is just one example of the resurgence in CLOs.
The first CLOs to appear after the financial crisis were issued in 2016; at that time, between $2.0 billion to $2.5 billion of CLOs were issued. Issuance climbed to about $8 billion in 2017 and estimates are that between $13 billion and $18 billion in CLOs could be issued in 2018.
The ability to recycle capital through the CLO market is providing a significant amount of loan funding for bridge lenders, resulting in better rates and more bridge loan options for borrowers. Bridge loans are conventional, primarily floating-rate first mortgage loans secured by unstabilized income-producing commercial real estate properties that have vacant or underutilized space that is being marketed to tenants. Bridge loans provide for flexible prepayment options that allow borrowers to refinance into a permanent loan once the “value-add” activity is complete. Rates, which were typically LIBOR plus 600-700 basis points (bp), have fallen to LIBOR plus 400-600 bp and fixed-rate bridge loan options are now available starting in the 6%-7% area.