Finance debt

Ares closes $ 667 million CRE CLO

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Ares Commercial Real Estate Corp. entered into a secured commercial real estate loan obligation of approximately $ 667 million.

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The Commercial Real Estate CLO funded the interest on 23 senior loans, with an initial prepayment rate of 81% and an initial weighted average coupon of one month LIBOR + 1.17%, excluding transaction fees.

The CLO is a matched, non-recourse, non-market-valued term financing granted to Ares.

The transaction would have provided several advantages to Ares:

  • It reduced the weighted average cost of funds.
  • It increased non-recourse funding from 36% as at September 30, 2020 to 67% of the total total outstandings under Ares’ financing facilities and securitizations.
  • It allowed Ares to close $ 146 million in new loans previously held in its real estate debt warehouse.

This was Ares’ fourth securitization “in the current market environment, which we believe validates the strong credit quality of our loan portfolio,” Ares CEO Bryan Donohoe said in a prepared press release. The securitization allowed the company to optimize funding for its existing assets by repaying outstanding amounts under its secured financing facilities and enabled ACRE to close $ 146 million in seven new loans, according to Donohoe.

Anatomy of a Crunch

But how does this proximity fit into the larger image of CLO / CMBS?

It did not take long in the pandemic (as we currently perceive its dimensions) to the CLO market at a standstill, and that the expectations of issues of up to $ 25 billion in 2020 be definitively abandoned.

Of course, the volume of commercial real estate transactions favors the issuance of CMBS and CLOs, and the situation does not give cause for optimism.

In early November, the Mortgage Bankers Association reported that commercial and multi-family loan origination fell 47% in the third quarter from 2019. “All major property types and sources of capital were down from the third quarter. of last year, “said Jamie Woodwell, MBA vice president of commercial real estate research, in a prepared statement.

And just last week, Morningstar predicted that, with the pandemic slowly fading at best and the retail and hospitality sectors still struggling, CMBS faces lingering problems with delinquency.

Regarding the commercial real estate CLO market in particular, Morningstar notes that after explosive growth in 2019, “the 2020 volume fell by more than half to about $ 9 billion” from $ 19 billion. dollars in 2019.

However, the company expects a substantial increase in CLO volume, to around $ 12 billion this year, “as lenders have healthy balance sheets and their bridging loans hold up well during the pandemic, likely because many of these transitional properties were conservatively taken out and assessed in a state of distress. “

Similarly, in early January, American Banker announced that CLO activity had rebounded in the second half of 2020, with investors particularly interested in senior and mezzanine tranches.