Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors

CHAPTER 17

European Commercial Real Estate CDOs

Chris van Heerden, CFA

Analyst

Wachovia Capital Markets, LLC

collateralized debt obligation (CDO) technology was first applied to European property finance in 2006. The active management framework of the CDO structure has increased the accessibility of European commercial real estate (CRE) investments by addressing (1) the high prepayment velocity identified with European CRE; (2) the lack of transparency in investments; and (3) the regulatory morass and country-specific investment nuances.

Although the number of transactions to market has been limited, the variation in managers, collateral, and structures make these deals useful benchmarks for developing an understanding of the market. This chapter reviews European CRE CDO collateral types and structures, and outlines an investor approach to the sector.

CRE CDO COLLATERAL

CRE CDOs in Europe employ a broad spectrum of collateral, generally reflecting the manager's overall portfolio and core competencies. In this section, we examine the major collateral categories, commercial mortgagebacked securities (CMBS), whole loans, Aand B-notes, mezzanine debt, and other sources with mind to the implementation of each in CDOs (summarized in Exhibit 17.1).

Because of a common link to real estate, most assets can be approached first on property fundamentals, including tenant/borrower credit quality, loan terms, and leverage, coverage, or cash flow multiples.

EXHIBIT 17.1 European CRE CDO Collateral ...