Cerberus Is Repackaging Near-Junk CMBS Into Top-Rated Securities

By Adam Tempkin and cross-posted from Bloomberg.

The big short is back.

Cerberus Capital Management is selling debt that packages commercial mortgage-backed securities rated at the cusp of speculative-grade into top-rated securities, a practice employed by collateralized debt obligations (CDOs) that contributed to the global financial crisis.

The offering bundles so-called interest-only slices of CMBS rated the lowest tier of investment grade into $300 million of bonds with preliminary ratings of AAA by DBRS Morningstar, the senior portion of a $390 million transaction. Some market observers are concerned that these strips might eventually be subject to losses.

“This is a CDO,” said Jen Ripper, an investment specialist at Penn Mutual Asset Management in Horsham, Pennsylvania. “There could be a real risk of some principal loss at the BBB- level, which most of these interest-only tranches are ‘stripped’ off of.”

The deal comes at a time when the CMBS market is in crisis, a victim of shutdowns stemming from the coronavirus pandemic that have battered revenues for malls, hotels and other commercial properties that back the debt. But the challenges also mean that hedge funds are looking for opportunities to profit amid the fallout…

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