Q&A: Say Hello to More CLOs

Jeffrey Baevsky, Executive Managing Director of Corporate Finance and Capital Market Finance, Greystone. Image courtesy of Greystone.

The U.S. collateralized loan obligation market is on its way to closing another strong year, possibly surpassing 2018 volume when $128.1 billion was issued. The total amount for the first half of 2019 is $63.84 billion, close to the $65.62 billion arranged during the same period last year, according to data from Thomson Reuters’s LPC Collateral. The availability of capital and search for higher yields has boosted the sector and the outlook is fairly optimistic.

Last month, Greystone closed a $600 million multifamily CLO backed exclusively by bridge loans. This is the company’s third CLO, after the senior housing CLO in 2018 and its first multifamily one in 2017. Jeffrey Baevsky, executive managing director of corporate finance and capital market finance at Greystone, discusses the lender’s latest move and lists the top three factors that will impact multifamily lending next year.

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In September, Greystone closed its third CLO. Tell us more about the deal.

Baevsky: Greystone CRE Notes 2019-FL2 is a $600 million CRE CLO with a 3-year reinvestment period. The collateral pool for 2019-FL2 consists of 37 loans that Greystone originated, secured by mortgages on 44 properties in 12 states. The CRE CLO accretively provides financing at a weighted average coupon of LIBOR + 1.46 percent before transaction costs.

The CLO market has made a post-recession comeback over the past couple of years. What are your expectations going forward?

Baevsky: Over the past three years, the CRE CLO market has demonstrated strong year-over-year growth and we expect that strength to continue through 2019 and into 2020.

Rising interest rates was one of the reasons behind the surge in CLOs. With more rate cuts expected, is it fair to say that CLO issuance ran its course?

Baevsky: Since the beginning of 2019, interest rates have been declining. However, the CRE CLO market is on pace for another record year. As more investors enter the space, we expect them to continue to have healthy demand for investment-grade floating-rate products from well-capitalized and experienced issuers.

How would you characterize the current multifamily lending environment?

Baevsky: The current multifamily lending environment is highly liquid and propped up by the strong demand in the multifamily rental market and low interest rates. Affordable housing is a top priority for the agencies—Fannie Mae, Freddie Mac—as they continue to increase their mission-driven goals to support this segment of the multifamily market. Overall, we are optimistic about the multifamily environment today.

What are the top three factors that will impact the sector in 2020?

Baevsky: Housing affordability—maintaining and developing affordable housing will be a focus for multifamily lenders and borrowers alike by taking advantage of various loan incentives and tax benefits, such as Opportunity Zones.

Political Environment—political uncertainty and policy changes with respect to rent control, banking laws and the Tax Cuts and Jobs Act will all have a direct effect on the commercial lending market in 2020. 

Economy—as we continue in the longest-ever economic expansion, lenders remain disciplined on leverage with a focus on the exit analysis.

More interest rate cuts and widening spreads are anticipated to impact lending. How do you think this phase will play out?

Baevsky: Overall, rates are still very low and the liquidity in the lending market keeps yields competitive. Gross coupons will continue to be attractive to borrowers in the near term and cap rates have not widened to put any true pressure on real estate prices.