The initial excitement following the launch of Europe’s first CRE CDO last year seems to be fast evaporating as predictions of double-digit issuance in 2007 could begin to look rather wide of the mark. This is being blamed on a combination of a limited European collateral pool, inter-creditor concerns and rating agency methodologies. The mezzanine and B note market in Europe is tiny compared with its US counterpart, and competition for collateral is therefore intense. But these loans are highly attractive to US managers, as Ron D’Vari, head of structured finance activity at Blackrock, explained at the recent Global ABS conference. "One of the motivations to move to Europe is that collateral here has lower leverage and borrowers are of higher quality," he said. "Collateral quality in the US has changed to higher-leveraged borrowers." Indeed, concerns in the US about aggressive underwriting and the high percentage of I/O loans in CMBS pools could lead to an increase in credit enhancement levels imposed by the rating agencies.
But Andrea Pittaluga of Standard & Poor’s voiced concerns on the same panel about the number of managers that Europe can support. "We are concerned when we see CRE CDO managers who are not real estate focused," he said.
