Archive for the ‘CMBS’ Category

The Return of CMBS

The first new Commercial Mortgage Backed Securities in nearly two years were sold this week. According to press reports, the deal was heavily oversubscribed, and with the securities offering a weighted-average coupon rate less than 6%, hope for affordable commercial real estate finance is returning to the market. But does this deal really signal “normal” access to credit for commercial borrowers?

On the favorable side, the deal was the first new issue eligible for financing from the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). The $400 million deal included $323.5 AAA-rated senior securities eligible for TALF financing. Surprisingly, the Fed reports that only $72.2 million in loans were requested to purchase these securities. Given the 15% required haircut, this implies that nearly three quarters of the AAA tranche were sold to investors that did not receive any preferential TALF financing. This suggests that demand for high quality securities exists and that government-provided below-market financing may not be as important to the CMBS market as first believed.

On the other hand, the structure of this particular deal was quite different than the typical pre-crisis CMBS offering. A typical conduit deal from a few years ago was backed by a large number of commercial mortgages diversified over a large number of different borrowers, regions, and property types. The tranching would have been complex, involving more than 30 different securities being issued with ratings spanning the entire credit spectrum. This week’s deal consisted of the securitization of a single, $400 million loan from Goldman Sachs to Developers Diversified Realty Corp (DDR). This single-borrower loan was backed by a portfolio entirely comprised of retail shopping centers. The underwriting of the deal was conservative, featuring a loan a loan-to-value ratio of 62% and a debt service coverage ratio of 1.44. This conservatism was mirrored in the tranching. The $400 million of securities were packaged into only three tranches, the lowest receiving an A-rating.

So while the DDR deal is undoubtedly a positive event for investors looking for new CMBS, the particular details of the securitization make one pause when considering the implications for CMBS-based financing going forward.

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The Fed announced Tuesday that previously issued (legacy) commercial mortgage-backed securities (CMBS) will become eligible collateral for the Term Asset-Backed Securities Loan Facility (TALF). This comes less than three weeks after announcing that only newly issued CMBS would become TALF-eligible.

The mission of the TALF is to increase credit availability. So how does expanding TALF-eligible collateral to include legacy CMBS help the Fed achieve this goal? High yields on legacy CMBS discourage the extension of new credit towards the purchase of commercial property. From the perspective of a lender, owning senior CMBS arguably provides a safer exposure to commercial real estate than new loan extensions, while at the same time, delivers a yield well in excess of what could reasonably be obtained in the market for new credit extensions.

As of last Friday, the yield on TALF-eligible CMBS securities was 684 basis points above the 10-year Treasury rate. (This implies a yield near 10%.) By making legacy CMBS securities TALF-eligible, the Fed hoped to spur demand for these securities, and as a result, decrease their yield spread. A week later and three days after the Fed’s announcement, the spread on TALF-eligible legacy CMBS has narrowed to 495 basis points. This suggests that the Fed’s announcement has helped narrow spreads.

Furfine - TALF, CMBS


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