Why don’t enough investors like CRE CLO securities? They all really should, and it would be terrifically helpful to the market if more of them did so. (Okay, terrifically helpful to me.)
We certainly have an abundance of bad bits and bobs out there right now, don’t we? War, pestilence, chubby dictators with rockets, buff dictators without souls, miscellaneous threats to world peace. It’s everywhere. Nonetheless, my take remains (see my prior blog, Prognosticator’s Regret) that, at least for our economy, all that doesn’t matter so much (how stupid does that sound?). It’s only through the transmission mechanism of monetary change that our economy is really impacted and regrettably, we’ve got that in full right now in the form of rapid, material inflation.
Why I’m bothering to write about SOFR transition at this point is a bit of a mystery. Hasn’t this topic now finally exhausted both our energy and interest? Oh, and a European war is being fought as I write which, to say the least, renders the kerfuffle over LIBOR somewhat less than consequential. But irrelevancy has not stopped me before.
Events keep happening that really do make it clear that we are about to enter a period of enhanced regulatory intrusion into the financial services space. Shocking! And entirely unexpected, right? (You’re winning, sir) While that is in many respects troubling, it’s also the stuff of opportunity for the creative and nimble. I’ll explain.
CREFC January 2022 – it was supposed to be the comeback conference. Everyone was pumped to spend a few days down south, getting together with their safely vaccinated clients, colleagues and friends. Meetings, mingling and mild mayhem were on the Miami menu. But days before the conference, the dreaded COVID, or more specifically Omicron, continued to rear its ugly head and put a damper on the plans of many. Emails with “Are you still going to CREFC???” were flying as the days counted down to January 9. Although many conference attendees chose to attend virtually, hundreds took a chance and made it down to Miami to enjoy the conference in person. Luckily CREFC is now well-versed in how to put on a virtual show, and those who were unable to attend in person were able to enjoy the panels from their office (or couch…or bed…).
Just a few weeks back, I penned a sunny and optimistic piece about the growth of the CRE CLO market in 2022 and by implication, the general amicable economic conditions on which the growth of that technology would depend. Being your basic risk-adverse type, I, of course, conditioned and limited my happy talk by excluding bad things that might proceed from disease, dictators and the Fed.
While I’m sticking by my predictions, my carve-outs seemed both more than a tad fainthearted and capacious enough to eat the proposition.…The Green Bay Packers will win the Super Bowl (by the way they will), assuming they get to the game and score more points than the other team. Not really helpful, is it?
Our fine little CRE CLO business has exploded over the past couple of years, hasn’t it? Last year, around this time, I recklessly predicted for my friends at Commercial Mortgage Alert that we might hit $30 billion of issuance in 2021. I was the outlier…by a lot. Well, it looks like we’ll finish the year closer to $45 billion and it’s clear that in the first quarter of 2022 we will be on fire. Now, of course, I also thought that we’d have a fantastic year in early 2020 and then that pesky little bug changed our lives, so please consider my on-fire prediction subject to caveats, limitations and restrictions including, but not limited to, disease, dictators and the possibility that the Fed is making a colossal mistake.
All else being equal, the CRE CLO business will continue to grow and I don’t really see the appetite for this technology receding any time soon. Could it? Sure. Annoying black swans aside, if the curve radically changes shape and creates outsized demand for fixed rate product, the CRE CLO business, as it has grown up in the past couple of years, will see challenges. But more on this later.
Welcome, dear reader, to our annual Golden Turkey Awards. But for my commitment to absolute fairness and concern over the appearance of impropriety, I would have awarded the first Golden Turkey Award to Dechert for actually getting the Golden Turkey Awards done this year. What a crazy year end. The market is insane.
On the other hand, while time is short, there’s plenty to bloviate about. I remember last year we were absolutely ready for the end of the Trump administration because the Biden administration promised a “dull is cool” vibe. Well, dull has been a failure. The farrago of lingering Covid, a return to something which is clearly not normalcy, but something new and with a pond full of black swans flopping around, it is not dull. So, how’s that working out for you? The follies of 2021 at least make writing this column easier. So, we went digging for inanity for the purpose of making gentle fun of things that broadly annoy us and, shockingly, we found things to talk about. So, here we are once again.
The Great Index Reformation is coming. (I note in passing that the last Reformation led to the 100 Years War…just saying.) This is a massive change to our market that did not bubble up from the great unwashed on the barricades demanding change, but something that has been driven from the regulatory heights. More a Peter the Great and less a Lenin sort of thing. This transformation of the entire floating rate market from LIBOR to SOFR is scheduled to arrive in a market near you on January 1, 2022. After that date, with very few exceptions, the banks will neither give nor take LIBOR. Of course, they actually could do so, as the FCA has said that one-month LIBOR will be representative until June of 2023, but the regulators have made it clear that to do so would be considered an unsafe, unsound banking practice and no bank is going to volunteer for that appellation.
It’s coming up on awards season. The Emmys were last week and weirdly, I got a thought bubble about nominees in the Black Swan category, walking the red carpet looking for attention! Think the Masquerade scene from Phantom of the Opera when the Phantom comes prancing down the stairs to harsh the festivities (at least he sang well).
We have some obvious nominees today. But are they the real thing? Will they move markets? We have, with some reason, become inured to the disruptive headlines howling about threats to our way of life. Is there simply too much chaos out there to pick out the things which are really relevant from the noise? Our 24-hour news cycle is hardly helpful, is it? The talking heads, with practiced expressions of concern, seriousness of purpose and faux competence, serve up our daily quantum of fear and distress (Film at 11!). Don’t they seem almost gleeful to report yet another potential disaster? With breathy anxiety, designed to tug at our atavistic fight or flight instincts, they repurpose as news exaggeration, hyperbole, vague allegations, unconfirmed reports and sheer speculation.
The scary part is, of course, that buried and obscured in all that noise might be real news, things that investors and market participants really ought to be paying attention to because they will matter. The trick is sussing out the stuff that matters from the stuff that doesn’t.
So, we really do need to take into account these aspirational swans. One of them could be that figurative dead archduke.
Let’s take a stroll along the red carpet and chat up some of these swans.