CRE CLO Question

You are on the right track but there are importnat nuances to CLO’s that are not the same as CMBS structures. First things first, sponsors will use CLO’s as a form of back leverage. They use this structure to increase their leverage and returns on loans that they have originated. For example, a debt fund will pool 20 multifamily bridge loans ($100mm of total principal balance) into a vehicle at a 80% attachment point in which other investors will pay them ($80mm of total principal) a lower weighted average coupon. This allows them to profit off of the spread arbitrage. The same originating sponsors will retain the equity tranche (different that a CMBS B-Piece), which is at the bottom of the stack, and it has the lowest payment priority. In CMBS, the B-piece buyer is the DCH, and they appoint a special servicer. In CLO’s , the decision rights are mostly governed by the collateral manager. There is no ROFR. The sponsor is still intimately involved in the portfolio management and can sell if they want to. If a loan were to be sold less than par, equity tranche (sponsor) will likely be impaired, so they would be taking a loss. Selling a loan at a discount also triggers coverage tests for the trust, so I believe it rarely happens and I have not seen it happen. If a loan were to be sold at par (which does happen), those proceeds will be distributed amongst the investors of the trust and/or used to replace the loan with a similar loan with a similar coupon. Often times, you will see a sponsor buy a bad/defaulted loan at par, so as to not impair any bond holders, not trigger coverage tests, and to not make a bad mark on their reputation as a CLO issuer. However, after they buy this bad loan out at par, they are now holding it on balance sheet and still have to do the workout. Long story short, it isnt really the same process to buy a loan out of a CLO structure that is used to buy a loan from a CMBS structure. You just need to have a conversation with the sponsor and make a deal.