Cerberus Capital Management May Enter Riskier Markets

Cerberus Capital Management May Enter Riskier Markets

The company that acquired Chrysler LLC, Cerberus Capital Management, is set to purchase a good volume of securities that are linked to commercial mortgages, sources have indicated.

The private-equity company operating hedge funds revealed to investors the increasing use of debt in the market for commercial real estate. However, it appears that it is among a number of hedge funds that were enticed by the significant returns from the riskiest areas of commercial-mortgage-backed securities.

Investors are more prepared to take risks after near-zero interest rates offered little returns by looking investments that offer bigger returns despite the high risk associated with them.

Cerberus Capital Management gave investors the assurance that it may surpass the obstacles that have kept them from investing in the subordinated-debt market. The returns of such investments can reach up to around 35 percent. The intention of the company to expand into the market has raised concerns on the possibility that loans may be made by lenders on properties that have weak credit profiles to attain volume, which became an uncontrollable situation prior to the financial crisis.

The Cerberus CMBS Opportunities Fund, which aims to acquire commercial-mortgage debt, is set to be unveiled by the company. The plan includes acquiring the most risky portions of the market.

The weakening quality of loans for commercial properties and the huge influx of bonds that is set to enter to market were considered as the opportunities by Cerberus Capital Management. A good volume of commercial-mortgage-backed securities are expected to be released soon. Around $22.9 billion were already sold, which is four times the volume that was sold in the same period last year. Documents from the company emphasized the possibility of around $100 billion worth of new deals that may emerge this year.

Investors may also find another opportunity in the authority to facilitate the structure of commercial-mortgage-backed securities. This may be done through the removal of loans considered too risky while monitoring the handling of troubled loans.

The plan of Cerberus Capital Management indicates that it have some positions that are in conflict with others. Derivative indexes may be used by the company to acquire short exposure, according to sources with knowledge of the plan. Similar strategies were also used by other hedge funds.

Signs have also emerged as commercial-mortgage debt associated with property values it financed reached 100 percent last year, which is higher than the 80 percent for 2010.

CMBS is not new to the company since the entry of the company into the market was introduced by the former CMBS head of the propriety trading desk of Morgan Stanley. Returns of Cerberus Capital Management on commercial-mortgage bonds reached 11 percent by the middle of March.

Posted by James Fried on Tuesday April 09 2013, 9:51 AM EST. Ref: WSJ. Link. All trademarks acknowledged. Filed under Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0