Gramercy Capital Closes $1.1B CDO as Credit Concerns Hit Global Markets

August 09, 2007
By Gail Kalinoski, Contributing Editor

Citing the strength of our platform, Gramercy Capital Corp. has closed on a $1.1 billion commercial real estate collateralized debt obligation amidst a global financial market in turmoil because of the continuing worries about the collapse of the U.S. subprime market.

“This CRE CDO issuance, which was completed in the face of challenging conditions in the capital markets, is the clearest affirmation yet of Gramercy’s position as a top-tier commercial real estate finance company,” Hugh Hall, Gramercy Capital’s chief operating officer, said in a release issued Wednesday. “The deal was well received and we were able to sell our senior securities at spreads lower than the spreads on comparable CMBs, believed to be a first in the CRE CDO market.”

The CDO announcement comes amidst concerns both in the United States and Europe over how losses from the subprime mortgage loan sector are affecting credit markets. Americans woke up to news today that a French bank, BNP Paribas, said it was stopping withdrawals from three investment funds. In a statement, bank officials noted “the complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality of credit rating.”

Stocks here and in Europe dropped after learning that the European Central Bank had loaned more than $130 billion in overnight funds to banks in an effort to respond to the perceived credit crisis, according to reports from Associated Press and Bloomberg. The U.S. Federal Reserve today added $24 billion in temporary funds to banks here.

In light of all the uncertainty here and abroad, Susan Stupin, co-founder and managing director of The Prescott Group in New York City, said today Gramercy’s CDO transaction, “certainly does sound like an impressive accomplishment.”

Stupin, who was not involved in the Gramercy CDO transaction, told CPN, “What we are seeing is even though the markets are in turmoil, that deals are still very selectively getting done.”

She said that with all the volatility in the markets the “underwriting analyses are extremely careful and very thoughtful. I have to assume there was tremendous scrutiny of the (Gramercy) underwriting and of the underwritten assets. There was something that appealed to the marketplace.”

“This non mark-to market financing further bolsters our considerable corporate liquidity, lowers our borrowing costs, and match funds a large portfolio of AAA-rated CMBs selected by our Real Estate Securities Group and most of our fixed-rate loans,” Hall stated in the release. “We believe our ability to execute this transaction demonstrates the strength of our platform which will result in competitive advantages in the current market environment.”

Gramercy used the majority of the proceeds from the issuance of what it is calling CDO 3 to retire outstanding borrowings under existing secured repurchase agreements, to acquire a substantial portion of Gramercy’s existing fixed-rate commercial real estate loans currently financed in its two existing CDOs, and to finance a $752.1 million portfolio of AAA-rated CMBs.

The company said CDO 3 will create almost $350 million of immediate financing ability in its existing CDOs and secured repurchase agreements. It will also reduce Gramercy’s weighed average cost of debt capital.

CDO 3 issued $1.045 million bonds rated AAA through BBB-, and $54.45 million of interests that are not rated investment-grade. Gramercy retained the non-investment grade interests in CDO 3. It matures in 2017 and provides for a five-year reinvestment period. During that time, Gramercy can use the proceeds of loan repayments to finance new investments.

Gramercy contributed $347.9 million of commercial real estate loans and $752.1 million of AAA-rated CMBs to CDO 3, totaling $1.1 billion of aggregate outstanding principal balance of assets.

GKK Manager L.L.C. will serve as collateral manager for the CDO.

The joint book-runners and co-lead managers were Wachovia Capital Markets L.L.C, which also served as structuring agent, and Goldman Sachs and Co. Co-managers were Morgan Stanley & Co., Deutsche Bank Securities Inc. and Citicorp Securities Inc.

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