Why There Are So Few B-Piece Buyers

By Keat Foong

With industry hopes for a recovery pinned on the return of the CMBS market, power still rests in the hands of the B-piece buyers. But the pool of buyers remains limited, and that will be the case for the foreseeable future.

Why? Buyers of the first-loss CMBS issuances are often financial companies experienced in underwriting real estate debt and assets. These investors in the lowest-rated classes of CMBS securities need to be well capitalized and have an extensive real estate underwriting infrastructure in place.

For example, Torchlight Investors, one of the handful of active B-piece buyers in the market, invests in real estate-related debt for its institutional clients; provides financing, including permanent and bridge financing, for commercial real estate; and as a rated special servicer manages commercial real estate workouts.

These buyers of the B pieces of CMBS tranches—the B-rated or unrated bond classes—are further challenged by short process times: They may be afforded just a four- to five-week window to underwrite 70 to 100 properties.

“You need adequate staffing and a dependable group of experts in the field to digest and analyze the property information. You also need people who understand bond documentation and structure, as well as experience buying pools of loans, and there are not many firms who have that depth of experience,” commented Steven Schwartz, managing director in charge of acquisitions for Torchlight.

Additionally, B-piece investors may have to sink $400,000 to $500,000 to perform necessary due diligence and close on a transaction, added David Rodgers, principal at Park Bridge Financial, a company that advises B-piece investors.

Finally, B-piece buyers need to be “rock solid” companies, able to demonstrate certainty of concluding the transaction. “If the issuer cannot close the sale of the first-loss bonds in a typical CMBS deal, they generally do not get ‘true sale’ treatment—the loans stay on the bank’s balance sheet,” explained Schwartz.

For that reason, Wall Street could be wary of new players without track records, he added.

For more on the B-piece pool and its impact on the return of the CMBS market, see “Building Up the B Piece” in the May 2012 issue of Commercial Property Executive.