Ares Commercial Real Estate Corp. has closed an approximately $667 million commercial real estate collateralized loan obligation.
The commercial real estate CLO financed interests in 23 senior loans, with an initial advance rate of 81 percent and an initial weighted average coupon of one-month LIBOR + 1.17 percent, excluding transaction costs.
The CLO is match-term, non-recourse and non-mark to market financing to Ares.
The transaction reportedly provided several benefits to Ares:
- It reduced the weighted average cost of funds.
- It increased non-recourse financing from 36 percent as of Sept. 30, 2020, to 67 percent of total aggregate amounts outstanding under Ares’ financing facilities and securitizations.
- It enabled Ares to close $146 million of new loans previously held in its real estate debt warehouse facility.
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 statement. The securitization allowed the company to optimize the financing of its existing assets by repaying outstanding amounts under its secured funding facilities and enabled ACRE to close $146 million in seven new loans, according to Donohoe.
Anatomy of a crunch
But how does this close fit into the larger CLO/CMBS picture?
It didn’t take long into the pandemic (as we currently perceive its dimensions) for the CLO market to stall, and for expectations of as much as $25 billion in issuance in 2020 to be decisively abandoned.
Of course, the volume of commercial real estate transactions helps drive CMBS and CLO issuance, and the situation there does not lend itself to optimism.
In early November, the Mortgage Bankers Association reported that commercial and multifamily loan originations had fallen in the third quarter by 47 percent versus 2019. “Every major property type and capital source recorded a decline compared to last year’s third quarter,” said Jamie Woodwell, MBA’s vice president of commercial real estate research, in a prepared statement.
And just this past week, Morningstar predicted that, with the pandemic fading slowly at best and the retail and hotel sectors still struggling, CMBS faces ongoing issues with delinquencies.
As to the commercial real estate CLO market specifically, Morningstar notes that after explosive growth in 2019, “2020 volume plummeted by more than half to roughly $9 billion,” from 2019’s $19 billion.
The company expects a substantial increase in CLO volume, to about $12 billion this year, however, “as lenders have clean balance sheets with their bridge loans holding up well during the pandemic likely because many of these transitional properties were conservatively underwritten and valued at a distressed state.”
Along similar lines, in early January, American Banker reported that CLO activity rebounded in the second half of 2020, with investors especially interested in senior and mezzanine tranches.