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TMCNet:  KBRA Releases CRE CLO Trend Watch Year-End 2018

[January 10, 2019]

KBRA Releases CRE CLO Trend Watch Year-End 2018

Kroll Bond Rating Agency (KBRA) has released the CRE CLO Trends Watch Year-End 2018 report.

The CRE CLO market experienced robust growth in 2018 as this product type gained wider acceptance by investors and provided a competitive source of additional funding for transitional lenders. Full-year 2018 issuance approached $14 billion, up more than 80% year over year. KBRA observed a leveling of loan leverage increases in 2018 after a sharp jump at the beginning of the year, as this nascent market continued to mature. Other metrics like the average level of future funding in transactions-which is indicative of the level of transition of the underlying collateral-appeared to moderate as well.

However, KBRA also observed tightening loan spreads throughout 2018 as the amount of investment capital directed towards this asset class has driven competition for transitional, floating rate loan originations which serve as collateral for the securitizations. Loan spreads exhibited signs of flattening toward the end of 2018 after reaching a point where issuers could no longer compete on spread and still meet expected returns for their investors, CRE CLO issuers told KBRA. It is fair to say that the broader capital market volatility experienced toward year-end 2018, if it continues into 2019, will have a heavy influence on the stability and direction of loan spreads. Further, this could also hinder the broader CRE CLO new issuance market, as evidenced by a repeat issuer pulling a deal, BDS 2018-FL3, shortly after launch last month.

While capital market volatility puts a question mark on 2019 trends and issuance activity, KBRA believes now is a good time to provide updated commentary on some of the trends among recently issued CRE CLO deals. For example, notable trends in 2018 include a rise in managed transactions and the number of transactions containing a ramp-up feature. The CRE CLO Trends Watch - Year End 2018 rolls forward the analysis and observations noted in KBRA's CRE CLO Trends Spotlight report, which was published in early Q4 2018. Since that time, KBRA has rated seven transactions.

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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