The future of high-yield debt funds.


As competition increases in the high-yield debt space, the term "high-yield debt fund" becomes less and less accurate.

"It might be 'higher yielding,' but high yields are a thing of the past," said Steven Schwartz, managing director with Torchlight Investors, New York, speaking at the MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo in February.

Schwartz said he sees "hand-to-hand combat" in this sector. Transaction volume could reach $400 billion this year--approaching peak volume. "The year 2011 is long over. Nothing is falling from the sky," he said.

The good news, Schwartz said, is that fundamentals remain solid. "Interest rates are at historic lows. Spreads between cap rates and the 10-year Treasury are wide enough that you can buy a property and finance it at levels that produce double-digit returns. There's limited new construction ... the financing markets are wide open," he said.

Values bounced back, too, Schwartz added. "I don't want to say the credit crisis never happened, but it's in the rearview mirror now and that feels good," he said.

But challenges remain. "The bad news is that oil is cheap at $50 a barrel and interest rates have nowhere to go but up," Schwartz said.

"And there are foreign situations like Greece, [Russian President Vladimir] Putin and ISIL [the Islamic State of Iraq and Levant],These are things that you didn't need to think about in 2007. It's not for the faint of heart."

Jeffrey Krasnoff, managing partner and chief executive officer of Rialto Capital Management LLC, Miami, predicted the next wave of high-yield business will come from adding value to existing assets. "We think value-add is a good business to be in," he said. "Looking ahead, senior shorter-term floaters are going to be a good bet over the next few years and after that, construction loans."

The commercial mortgage-backed securities (CMBS) world also...

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