KKR places $1.1B bet on high-risk CMBS

Private equity firm is betting on B pieces

KKR's Matt Salem
KKR's Matt Salem

KKR is betting $1.1 billion on the riskiest commercial mortgage backed securities, trying to capitalize on new rules under the Dodd-Frank Act.

The private equity firm closed on an investment fund to buy so-called CMBS B pieces. In December federal risk retention rules went into effect, requiring CMBS issuers to keep 5 percent of bonds on their books. Issuers could get around that requirement if they sold off the riskier B notes to an investment firm, if that firm agreed to hold on to them for five years.

The idea is that B piece investors will pay close attention to underwriting, minimizing the kind of reckless lending that toppled the U.S. real estate market in 2007.

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“What we determined was there was going to be a need for an increase in capital for B-piece buyers,” KKR’s Matt Salem told the Wall Street Journal, adding that he expects $2 billion worth of B pieces to sell this year. The firm has invested around $225 million in B pieces across six transactions since December.

Rialto Capital Management, C-III Capital Partners, LNR Partners and Eightfold Real Estate Capital are also big B piece buyers, according to the Journal. Despite the new risk retention rules, CMBS issuance in 2017 will likely top last year’s $77.6 billion mark. [WSJ]Konrad Putzier