CMBS Opportunity Funds

between 2009 and 2015 Palatium established and managed a series of funds invested in UK and European Commercial Mortgage Backed Securities (CMBS) secured predominantly by institutional investment property to take advantage of ‘Post Lehman’ pricing dislocations. The strategy built on our particular experience of CMBS through the Eurohypo-sponsored Opera platform and as collateral manager of Glastonbury Finance 2007-1 plc.

Consistent with our overarching investment philosophy, we adopted a “bottom-up” underwriting process for selected CMBS issues focusing on:

• Quality of the underlying real estate including rental value, vacancy and reletting analysis
• Strength of the underlying cash flows and tenant covenants including stressed cash flow analysis
• Detailed exit analysis considering maturity and refinance risk together with downside analysis considering default scenarios
• Quality of the sponsors with consideration of track record and likely ongoing support for the transaction
• Structural elements of the CMBS and underlying loan documentation, in particular intercreditor arrangements, loan level covenants, waterfall arrangements, noteholders’ entrenched rights and expertise of the servicer
• Review of all ongoing transaction reporting

Consequently we were able to target precisely certain bond issues and to focus on individual tranches (often subordinated or mezzanine) where our underwriting implied excessive discounts being applied by the market to the individual positions.

We were able to underwrite and acquire bonds at a level where investors’ capital was protected but where we had a strong degree of confidence in the potential for substantial returns.

Our investment strategy was to buy and hold to maturity, but we took advantage of market rallies and special purchasers to sell what we regarded as fully priced bonds.

Notes:

1. IRR and Cash Multiple stated pre fees and pre promote