Seeking Alpha
Banks, long-term horizon
Profile| Send Message| ()  

On October 25 I posted "Blackstone Hits a Home Run!". This piece and another I wrote on the same subject, "A Glut of Opportunities: Part 2," discussed the activities of Blackstone Group LP was attempting to create a new asset class of securities, securities backed by the cash flows coming from renting out homes that it had purchased over the past several years.

With the low market interest rates for corporate borrowing, Blackstone has moved heavily into residential real estate, acquiring over 40,000 housing units in the past two years.

Now, Blackstone has created a package of securities using the cash flows from more than 3,000 of these homes to back the securities. The new asset class is being called "Reo-to-rental" or "single-family rental" securitizations.

Tracy Alloway and Anjli Raval reported in the Financial Times that the "top slice" of these issues will receive a triple A rating from three … not one as previously thought … rating agencies. These agencies are Moody's, Morningstar and Kroll.

The key to this high rating, according to Moody's, is the fact that if the rental payments slow down, Blackstone can sell the homes and pay off the securities, giving investors "double" protection from any financial problems.

There are some detractors. Fitch Ratings, for example, warns that it might not be so easy for Blackstone to liquidate its holdings, while others question Blackstone's ability to manage such a large portfolio of properties that are scattered all over the country.

The deal is moving along. Involved in the transaction are Deutsche Bank, Credit Suisse, and JPMorgan Chase.

The deal, valued at $479 million was informally marketed last week in road show meetings with the formal pricing process to begin this week. The "top slice" of the transaction is $278.7 million.

Alloway and Raval write that the yield will be around the "low to mid 100 basis points" over swaps for the "top slice" of the cash flows.

Interesting deal … a product of the times.

Credit inflation is creating the low interest rates for Blackstone so "sweep up" the real estate and there is an enormous amount of credit around to finance the "deal" coming to market. The signs are all positive for a "new asset class" to be created.

Long live financial innovation!

Source: Follow Up To 'Blackstone Hits A Home Run!'