wsj reports blackstone/deutche exploring bonds

[Abhay K.]

"Blackstone and Deutsche Bank are in talks to sell a bond backed by home-rental payments"

After gorging on SFH, here comes exit strategy for Blackstone...

Any comments from note veterans if there is an opportunity for notes investors in this. Or is this more about broadening the market for notes to mutual fund investors ?

[Dion DePaoli]

I do not think so. Investors have influence on the acceptable market yields in the backdrop of where US Government bonds trade. That is, the risk free rate of return that you can get on a Treasure Bill, backed by the full faith and credit of the United States. Mortgage notes are set on spread on the market indexes. Right now we are seeing the lowest spread between Risk Free bonds and 30 Year mortgages. It is a little bit of an anomaly, the risk in risk free is zero, the risk in mortgages is more than zero. The spread is not accounting for the risk. That said, there is lots of money after mortgage bonds since the yield as a matter of number is higher and to some degree that is what really matters to investors.

I am sure these firms have a plan and it all make sense but I tend to think this will be a problematic securitization space. The bonds performance, which is based on the underlying rental payments, could have some volatility from year to year. Additionally, we don't fully understand what the rental market will look like in 10 years. Also, the ratings on these things right now will be non-existent. It is difficult to build a credit profile on a tenant in an asset which turns the tenant over every year. At the least, you not see this ranked as 'AAA' anytime soon. As such, mutual funds would likely be excluded from purchasing these bonds I believe.

My guess, this is really just a method for these guys to finance the trade. They probably have some short investment horizons for these as their bread and butter is still within the 'normal' scope of fixed income products such as MBS, RMBS, CMBS, ABS, etc. Likely not a large volume of issues so the institutional counterparty who buys them can park their money for a couple years and still exit out in the short term while getting a competitive yield on their capital.