As issuance of CMBS ramps up again, so do concerns about deterioration in the quality of loans used as collateral.
Spreads investors were willing to accept on CMBS narrowed early in the year amid a broader decline in risk premiums and a reach for the relative yield offered by these securities. At the end of March, the average CMBS 2007 super-senior tranche traded at 194 basis points over swaps, down from 320 basis points over swaps six months earlier, according to
However, there was some resurfacing of market volatility in April, based on news that the Federal Reserve is looking to offload CMBS acquired as part of the AIG bailout through the Fed's Maiden Lane III vehicle, along with the resurfacing of European and U.S. economy-related concerns. (Please see
This does not mean that the CMBS market is slowed by this recent turn of events. In fact, Deutsche Bank Securities CMBS analyst
The spread tightening in the beginning of the year sparked a frenzy of deal making, with
There was another
There's also a robust pipeline of deals in progress.
Furthermore, the rating agency said that second-quarter transactions are expected to pick up considerably in terms of deal size and loan diversity. The average offering size will rise by roughly 40% from 1Q12, to roughly
Some participants expect that issuance could reach
"The competition is heating up, and lenders are competing quite aggressively again at this stage for loan assignments," said
Berenbaum said the spread tightening makes conduit lenders a bit more competitive in relation to portfolio lenders for certain properties and weaker markets.
"Everybody is trying to cannibalize the same business," said
More conduit lenders are active, with established lenders such as
In early 2011, there were three or four active conduit lenders, according to Berenbaum. This went up to about 24 lenders as the market started heating up last year.
He said that when the market volatility surfaced last summer, about six players dropped out, including a prominent departure by
Berenbaum is not sure whether enough loans will be able to be made that meet lender requirements. "A lot of the loans that are coming due are either fairly low on a debt-yield basis or way too overleveraged," he said. "It's a matter of whether the borrowers can inject enough equity to get down to the 70 to 75ish loan-to-value ratio that lenders are requiring on the first mortgage."
Still, Berenbaum expects that loans at the margin will have an easier time refinancing this year as the market situation eases.
Taking advantage of the demand for product, two recent small deals from
One of these deals, the
The collateral backing the loans includes about 75% commercial real estate property types and about 24% homebuilder and commercial lots as well as homebuilder inventory.
He expects that this sort of deal, which has been well received by the market, will find favor with the more savvy investors, such as hedge funds that want to invest in distressed real estate.
Considering the competition for product, Berenbaum is seeing investors get more leery about the loans that are made. "Investors have to be cautious and look through the loans that are making their way into these pools," he said. "The gatekeeper is still the B-piece buyer, who is in the first-loss position, to put the brakes on any overly aggressive lending."
According to Standard & Poor's, during the 2006-2007 peak of the CMBS market there were about a dozen B-piece players that bought more than
This year, as of the first quarter, three B-piece buyers have been active, buying about
Hotel collateral tends to be viewed as more vulnerable to a downturn since hotel prices reset daily, whereas industrial and office properties have long-term leases.
Hotel delinquencies were at 10.63% in March, compared with 9.68% for all CMBS delinquencies, according to
By comparison, overall CMBS delinquencies were up from February's 9.37%, as newly delinquent loans put upward pressure on this metric.
Multifamily, at 15.39%, and industrial properties, at 12.54%, were the worst performing on the delinquency front in March. Office and retail properties were at 9.41% and 8.24%, respectively.
Balloon loans from 2007 that don't pay off and are not current could further pressure delinquencies this year, Berenbaum noted.
While B-piece buyers may still be scarce,
With the emergence of the "CMBS 3.0" format last fall, which brought back public issuance and a super-senior tranche with heightened subordination levels, money managers who had restrictions on participating in private 144A issuance are now able to invest in recent CMBS offerings. As well, those who are interested in index-linked deals are drawn in.
He also pointed to local presence as a factor that added to staying power for originators. "A lot of
Berenbaum expects that lenders with managements that are more committed to this space, and that don't see more attractive places to put their capital, are more likely to stick around.
He said a return of market volatility could pose a problem considering that there is still no good hedging mechanism for loan originators who warehouse loans until they come to market.
Even then, Alpert is not fully convinced about the staying power of the economic recovery, considering that in the past two years the recovery has slowed down just as it was getting to a critical takeoff stage.
"There's been the assumption that we're seeing some kind of recovery in
Rialto CMBS Sets Precedent
The recent CMBS backed by nonperforming commercial real estate (CRE) loans from
The underlying properties comprise commercial and multifamily loans, which represent 90% of Fitchstressed recoveries. The pool also has residential and commercial land and single-family residences, which make up 10% of Fitch-stressed recoveries.
"We expect more securitizations with these types of pools now that there is a benchmark deal to help the market understand what the execution of these transactions will look like," Fitch managing director
The rating agency also expects a pick-up in CMBS backed by nonperforming product considering the significant distressed commercial real estate volume that is still with servicers and lenders. There is also the rising number of loan sales done to get rid of troubled CRE loans.
The common resolution strategies for troubled CRE loans are modification, foreclosure and liquidation, discounted payoff, and loan sales, although loans sales are increasingly becoming more common.
"Based on recent resolution activity, loan sales are being more frequently used to dispose of troubled loans, particularly smaller balance loans," Chambers said. "We expect to see some of these loans recycled through nonperforming loan securitizations, given the efficiency of securitization relative to alternative financing options available to distressed debt investors."
In terms of the properties, Chambers said the collateral behind these NPL-backed offerings, as exemplified by the Rialto deal, might be a function of the product local to some of the lenders involved in these loan sales.
One obstacle that these deals have to overcome is investor acceptance. According to Chambers, for investors, the primary thing is conviction in the predicted recovery levels on the individual properties.
"These deals often include loans secured by tertiary and unusual property types," Chambers said. "As the visibility of recovery value in these properties has firmed up, market participants can better assess expected recoveries relative to stressed acquisition prices." He added that there was a time sellers and buyers did not agree on the value of these properties, which is now lessactua frequently the case.
Fitch reported that since 1Q09,
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