The nascent market for securities backed by commercial real estate is about to take off, and many bankers can't wait.
They see a myriad of opportunities to profit from these transaction, ranging from garnering fees for underwriting the deals to using securitization as a vehicle for cleansing their balance sheets of realty assets.
Whatever role commercial banks play - whether as sellers of assets or providers of investment banking services - experts say commercial-real-eastate-backed securities are gaining momentum with investors and the time to jump into the market is now.
"This is the future of the business, fundamentally," said Robert A. McCormack, executive vice president and head of the real estate group at Citicorp.
RTC Deals Tapering Off
Last year the volume of publicly and privately issued securities collateralized by commercial and multifamily real estate assets reached $14.6 billion (representing 55 issues), according to Commercial Mortgage Alert, an industry paper.
Most of the volume came from deals involving realty assets disposed of the the Resolution Trust Corp. But RTC deals have tapered off, and the market is now bloated by securities backed by realty assets from banks, insurance companies, and other lenders.
Sixty-six transactions worth $9 billion were completed in the first nine months of this year, according to Commercial Mortgage Alert. Just over $2.2 billion involved RTC assets, the rest came from other sources.
Deals Expected to Double
Expert expect issues this year to nearly double last year's volume. Banks anxious to shed realty assets will add to the volume, while new accounting rules requiring insurance companies to set aside more capital for real estate holdings will fuel growth in securitizations.
"We think that the private marketplace will play a much larger role than the government market," said Rick Landau, senior managing director at Bear, Stearns & Co.
Wall Street firms like Bear Stearns, Goldman, Sachs & Co. and CS First Boston Corp. have dominated the market for these issues. But a select group of commercial banks like Citicorp, Chemical Banking Corp., Bankers Trust Co., and J.P. Morgan & Co. are also anxious to reap big fees from structuring, underwriting, and servicing the issues.
The banks buy pools of multifamily realty loans and loans for commercial property, such as office buildings and shopping centers, and package them in groups that are assigned investment-and non-investment-grade ratings by the rating agencies. New originations are also being securitized.
The securities, which carry attractive yields, are then sold to investors. To date, most have been sold in private placements, but increasingly these securities are being publicly registered.
Bankers Trust is aggressively pursuing the business. The bank's section 20 subsidiary, BT Securities, has about 15 people dedicated to commercial real estate securitization, said Robert Blumenthal, managing director. The bank has done several deals, mostly placed privately, involving financing tenant leases for large retailers and securitization of construction lending.
New risk-based capital requirements for insurance companies "will force securitization to happen," said Mr. Blumenthal. The market has longevity."
Citicorp recently issued its first public offering of securities backed by commercial real estate loans. The issue - for $120 million worth of securities - is backed by mortgages acquired from the Resolution Trust Corp., the Federal Deposit Insurance Corp., and a bank, which Citicorp declined to name.
Although one loan in the pool was originated by Citicorp, Mr. McCormack said that the bank's goal is to serve as an adviser and underwriter on securitization deals. "We have never viewed it as an exit strategy for our business," he said.
The bank is working on other deals. Citicorp set up an indirect subsidiary, Mortgage Capital Funding Inc., to issue the securities. It filed a $2 billion shelf registration statement in August.
Chemical has similar aspirations. It formed a wholly owned subsidiary called Chemical Commercial Mortgage Securities Corp. in February that plans to buy loans, or participations collateralized by commercial mortgages, and repackage them as securities. The subsidiary filed a $3 billion shelf registration in August, but has yet to bring an issue to market.
Other bankers see asset securitization as a valuable tool for building a real estate finance business. Many banks, burned by bad real estate loans extended during the go-go '80s, are not extending credit to developers. But others, such as First Chicago Corp., NationsBank Corp. and Wells Fargo & Co., are actively pursuing builders seeking financing for existing projects.
First Chicago is now working on a $100 million issue through its London subsidiary for one of its real estate investment trust, or REIT, clients. The bank is co-managing a debt financing for the trust that will securitized and sold privately in Europe.
The banking company has applied for section 20 powers and plans to pursue securitization of realty assets as an outgrowth of its REIT financing business.
"With the proper powers, we see this as a natural extension of the financing things we do with our clients," said Daniel A Lupiani, corporate senior vice president at First Chicago.
Other bankers see securitization as a vehicle for shifting real estate assets off their balance sheets. A few, including Wells Fargo and BankAmerica Corp., have disposed of commercial real estate loans through securitizations that were either placed privately or offered to the public by an investment bank.
Wells, working with First Boston, securitized performing loans and placed the securities privately. BankAmerica hired Morgan Stanley, which set up a partnership to finance the purchase of $1.6 billion of distressed loans that were sold to the public.
Nonperformers Pose Problems
While they see a viable market for securities backed by performing loans, bankers are dubious about securitizing nonperforming loans. The process is complicated because pooling the loans and establishing a realistic appraisal value is difficult.
Also, securing a rating is an evolving process, while standards concerning capital and reporting treatment of deals with recourse are still being worked out by regulators.
Some bankers with nonperforming-loan portfolios who have been approached by Wall Street firms or other commercial banks with offers to securitize the assets have backed away from the deals because they see little benefit from such an issue.
A case in point is National Westminster Bancorp, which was in discussions with NationsBank a year ago about securitizing nonperforming loans. Sources said that after looking at the numbers, Natwest ended the talks. The bank eventually sold the loans in a bulk sale.