Jacob Lyons, md at CR Investment Management, answers SCI's questions

Q: How and when did CR Investment Management become involved in the CMBS market?
A: At the core of CR Investment Management's philosophy is the marriage of credit skills with the understanding and operation of underlying assets. Our focus is on real estate and shipping: both asset classes have similar dynamics and a similar client base.

Also at the core of our philosophy is our independence - we are neither owned by nor captive to investing capital. That independence, combined with private ownership, enables us to provide outstanding client service, with the highest standards of professional integrity to develop enduring relationships of trust and confidence. We are not constrained by short-term thinking or goals.

We began by concentrating on cross-border business, mainly banks operating outside of their domestic jurisdictions; UK banks in Germany and vice versa, German banks in Holland and vice versa, US banks in Europe, etc. Because they were often deemed as non-core foreign operations, this proved to be easier than approaching domestic banks in their home markets. But over time we started to win domestic business too and are now working with German banks in Germany, Irish banks in Ireland etc.

With respect to CMBS, the firm is very hands-on in both the operations side and the credit/restructuring side of the business. The aim is to provide a holistic, solutions-driven platform that spans asset management and advisory services through to work-outs and disposals, from assets to loans, and on a portfolio or single-position. Clients mandate us to work either across the whole spectrum of our capabilities or for discreet elements of them.

A headline case that we worked on was the restructuring of the €940m Mozart loan, securitised in Talisman 7 (SCI 12 July 2011). Through a variety of measures, we have added in excess of €70m of tangible value to the portfolio as well as successfully sold-down some of the most difficult and illiquid assets. Our work has essentially made an entire class of notes whole. Our other CMBS-related mandates include asset management of the Treveria C and D facilities (SCI 13 February), amongst others.

We transacted over €500m of commercial real estate last year, with deal sizes ranging from €50,000 to €50m across a number of portfolios and single assets. There is a strong bid for the latter in Germany, whereas in Ireland for example, portfolio transactions are extremely popular with both sellers and buyers.

The firm is head-quartered in London and Berlin, but operates from nine offices across Europe - five in Germany and one each in Amsterdam, Dublin and Paris.

Q: How do you differentiate yourself from your competitors?
A: I wouldn't say we have any direct competition because we are solutions-driven, delivering the expertise of multiple disciplines simultaneously. As such we can bring a level of competency and ability in execution to a particular situation that would otherwise need to be found by hiring several firms at once. Furthermore, while we are pan-European as a whole, each unit has staff on the ground that understand the specifics of the relevant local markets.

Q: What are your key areas of focus today?
A: The business has changed dramatically since we were established in 2004: the crisis played directly into what we do. And the environment is accelerating - the closer deals get to their legal finals, the more work-outs we'll see as portfolios have to be liquidated.

The main reason why so many CMBS loans need to be restructured is that the assets have never been managed and were often neglected. Institutions bought the portfolios, but never expected to hold the assets for so long. The basics were never covered because investors expected to be able to sell the assets quickly.

In terms of working a loan out, the starting point is to determine exactly what assets are in the portfolio. The existing data is often wrong because there has been a significant change in measurements from 2004-2007. You can't take anything on trust and essentially have to re-underwrite the loan.

The next step is to decide how the cash allocation will be split across properties, followed by stratification of the portfolio. Generally, if there is such thing as an average case, the most distressed assets or loans - those that are impossible to do anything with - will likely be sold, with the remainder repositioned to affect change and extract value.

The asset management approach varies depending on the asset and the type of institution holding it. The greatest differential is usually the exit horizon - which tends to be longest in the case of government-owned or quasi government-owned institutions.

The jurisdiction where we're very active at present is Ireland. Transaction volume is strong - there is plenty of money and a good fundamental macro story, even to the extent that they got ahead of the pack and took pain early. The defining factor will be to continue to pique investor interest, especially amongst those non-Irish investors. Indeed a large element of what we do is to deliver the international capital markets to what are often local or supra-local situations.

The German market is also active for small transactions sized at €50m and below. Bank financing is increasingly constrained for larger deals, but remains reasonably liquid at the smaller end.

However, the Dutch market is very difficult. This is due to over-leverage creating constraints in operating assets at sensible and competitive levels. Borrowers are often unable or unwilling to be proactive and the recent nationalisation of major banks has resulted in further stagnation. We believe that this stagnation presents an opportunity both for banks with smaller exposures to exit quickly, but also new capital to look to exploit the opportunity to buy loans at discounts, using that pricing differential to undercut their competent in an environment where the incumbents are constrained to hold out for unrealistic levels of rent.

Finally, the French market remains very quiet. Foreign lenders generally didn't to expand into France and French banks were often more conservative than most.

Q: What is your strategy going forward?
A: We're currently focused on new markets; we're about to open an office in Spain, for example. It's an interesting time to enter that market because it is heavily disciplined by the EU and so provides a historic opportunity for us to bring a pan-European platform to bear. We are assembling a team with both international and local expertise.

We're also considering expanding into other asset classes as well as shipping. These potentially include other transportation assets - such as rail and aviation - as well as more exotic structured credit assets. European banks are looking to dispose of legacy portfolios. We have taking on everything from banks, from individual assets and loans all the way through to entire businesses. So having the same team managing an entire legacy portfolio, rather than just the CRE portion of it, makes sense.

It's proving difficult for banks to pay and retain experienced people to run these portfolios. People would rather work outside of the bank and join an organisation that's deliberately in the business, rather than just by virtue of winding-down legacy assets. In addition, the relative cost to outsource the operation is advantageous for some banks and will help them to reposition for recovery. The dual advantages of higher quality at lower cost are compelling.

Our unique position and offering enables us to attract, develop and reward exceptional people who work collaboratively, sharing knowledge and expertise and their commitment to bringing the full strength, depth and diversity of CR's expertise to the client.

Q: Which major developments would you like to see/expect from the market in the future?
A: The CMBS servicing business will be an interesting space to watch develop. The paucity of new issuance and the refinancing of legacy deals will reward those able to source new business opportunities. Some may for example decide to build underlying asset and/or restructuring expertise. The key in our view will be the investment in recruiting the human resources with relationships across the European financial services sphere, as well as flexible and transferable skill-sets.

Looking at the wider European CRE market, a funding gap remains. Senior and mezzanine lenders still can't agree on much because they have different ideas and motivations. And it's tough to get deals done in a turbulent market, where assets are priced sharply and are much further up the risk curve than historically was the case.

In one form - or name - or another, we expect European CMBS volume to rise significantly over the next three to four years, possibly to between €40bn and €50bn. Transactions will not necessarily be structured in the conventional sense, but as a conduit to liquidate legacy portfolios. Other than securitisation, there is no other known solution that can re-distribute the €3trn of legacy assets in an orderly and timely manner. At the same time, there is demand for liquid fixed income securities that generate high coupons.

But risk retention rules remain a stumbling block in terms of market development. The €3tn question is what will give first, regulation restricting securitisation, or the need for governments to reduce their stakes in banks. We may see that dam breaking with non-bank originators of CMBS emerging as a result.

CS