Resurfacing from last year's capital markets fallout, several former executives from Nomura Securities' defunct Capital Co. of America are now in place at a new New York-based lender, CDC Mortgage Capital Inc.
With well-knownprofessionals on board, backed by one of the largest French financial institutions as its parent company, CDC Mortgage Capital expects to be a major capital provider in the competitive field of commercial real estate lending. For now, its focus is providing floating-rate mortgages and other more esoteric financial products that may no longer appeal to some Wall Street houses. As the field of CMBS participants has narrowed, CDC executives says they see great opportunities for the firm to be an efficient boutique lender - not just another conduit or CMBS factory.
CDC's staff of 20 professionals is comprised of several former Nomura employees who have joined the team since its formation in April 1999, which coincided with the demise of Capital Co. of America.
CDC had originally planned to be a part of the permanent loan market, but quickly discovered it to be an overly competitive arena with more lenders than borrowers. "We originally expected to do a lot of permanent loans. But when we started at CDC, we found the opportunities in the interim, floating-rate market to be more attractive, as there was a significant amount of capital allocated to the permanent-loan market and not a lot of demand," says Chuck Rosenzweig, a CDC managing director. Last year's capital market crisis shook up a lot of real estate investment and business plans, shortening the window on long-term planning and consequently making short-term financing more palatable for both borrower and lender, neither of whom are eager to be tied into longer risks.
Rosenzweig says CDC expects to close between $750 million and $1 billion of mostly three-year, floating-rate commercial mortgages in the United States by the end of 1999. He says the firm also expects to issue its first securitization of approximately $750 million in floating-rate loans either later this year or early next year. He adds that CDC has been presented with $14 billion in potentialso far this year, most of them from principals who had a previous relationship with CDC executives.
Beyond that, the firm plans to expand internationally, a natural foray considering the group's parent - Paris-based Caisse des Depots et Consignations (CDC) - is a well-respected international bank with deep pockets. The parent company was established in 1816 to safeguard the French financial system and has since grown to a Triple-A rated financial house that manages money for institutions worldwide.
CDC ventured into the United States in 1990 with the formation of CDC North America, which has since managed investments of more than $10 billion for institutional clients worldwide. CDC currently allocates in excess of $12 billion for the purchase of commercial mortgage securities, mortgage-backed securities and asset-backed securities through its U.S. investment arm.
One key to its success in the residential mortgage arena was that it had a financial wherewithal that others did not, says Brook Payner, a CDC veteran who will be leading the new CDC Mortgage Capital team and is also in charge of CMBS, MBS and ABS in the firm's Capital Markets Group. Payner says that this depth of capital should ensure that CDC Mortgage Capital will be able to withstand any capital market disruptions.
The CDC team The three managing directors reporting to Payner are all former senior executives of No-mura's Capital Co. of America: Rosenzweig, Perry Ger-shon and Barry Funt.
Rosenzweig is responsible for originations. As a managing director at Capital America, he headed the Eastern Region and supervised origination activities of more than 75 employees. He also led a transaction team that sourced, structured and closed in excess of $4 billion in real estate transactions, the majority being large loans and structured deals including participating debt, senior equity and mezzanine financing.
Gershon heads securitization and is responsible for loan credit, underwriting and securitization of loans. He held the same post at Capital America, where he also was responsible for all contacts with credit rating agencies. Gershon was instrumental in developing Nomura's trademark "Mega- deal" transaction structure and completed seven "Mega-deal" securitizations, eight other pool loan securitizations and numerous single-borrower securitizations.
Funt, who was general counsel at Capital America, is responsible for the operational aspects of the business. Besides its New York headquarters, CDC will also operate a Los Angeles office, which is headed by David Walker, a former senior banker at the Los Angeles office of Capital America.
Structured deals and RE risks CDC's focus is on retail, office, hotel and multifamily properties, "where we see positive things happening at the property over the next two years," Rosenzweig says. He adds that the group is particularly interested in properties located in larger U.S. urban markets, such as New York City office, hotel and residential developments. "We look for deals where we have confidence in the sponsorship and the business plan and where there is a high probability of the plan being accomplished," he says. "We also try to invest in the part of the capital structure that we feel is most optimal - this varies from deal to deal. Our approach is to do transactions where we wouldn't mind being an owner of the bottom portion of the loan."
A strong suit for CDC is that it is not constrained by any maximum loan amounts. Rosenzweig says that so far the firm's average loan commitment is in the $50 million to $70 million range, and the firm is concentrating on loans ranging from $20 million to $150 million and higher.
"Our focus is on deals that require structuring expertise and some element of real estate risk. We try to come up with the most creative and flexible structure to accommodate the borrower and at the same time accomplish our business objective, which is generally tied to a capital markets execution," Rosenzweig says.
Keys to success Gershon says the key to CDC's success lies in finding and performing well within the right lending niche. He says he envisioned CDC performing similarly to an early Nomura, which saw much success in the mid-1990s before its loan volume exploded. "At CDC, we have a stronger capital base and the ability to deliver a product that may not be available from anyone else, and at the same time see a good return and serve our clients well," Gershon says.
Rosenzweig says that CDC does not want to grow just for the sake of growing, but instead intends to be adaptable to market factors and remain comfortable in offering a product that represents an in-between spot between the safe investment-grade lenders in the market and the providers of higher risk, high-yield capital. "It is more appropriate for us to hone in on larger, more structured deals than to do a lot of deals," he says.
"Today's market requires being nimble," Rosenzweig says. "You have to find the inefficiencies in the market and target those opportunities. If the margins for providing permanent loans come back, we will be active there. We see opportunity in the market today and believe that flexibility is key," he says. Finding opportunities starts with the proper evaluation of a borrower's real estate business plan followed by appropriate loan structuring and the determination of "how all of that fits into our capital market execution."
"The lending market may now be more competitive, but the performance of our group continues to exceed expectations," Payner says. "CDC is very facile in structured asset investing. The approach at CDC has been to operate as a boutique and to look for intelligent ways to risk our capital," Payner adds.
Gershon emphasizes the need for a lending team to possess a thorough knowledge of both real estate and the capital markets. "We strive to offer a structurally innovative product that caters to investors' desires. Our competitive advantage is in our ability to present something new to Wall Street," Gershon says. "We may not be the cheapest shop in terms of pricing, but we have a reputation for doing what we say we are going to do."