Here’s a Pearl – Financing Update 5-18-2011

Bloomberg reported yesterday on a previously reported CMBS offering. That is not news, but the news within the news is that CMBS spreads* are declining along with corporate bond spreads. CMBS is seen as a good alternative offering acceptable yields. Thus CMBS is another alternative to investing in corporate bonds, especially junk bonds.

What Bloomberg does not report is the average leverage and DSC in the CMBS pool. It goes without saying, the leverage is what we euphemistically refer to as “moderate”, which is a polite way of saying its a lot lower than the halcyon pre-crash days.

The really curious number is the ratio of loans in the pool to the total number of properties secured by those loans – it’s about 1:2. No shortage of security there!

Bottom line: the amount of primo deals available to CMBS lenders is declining. That’s good news because that means the pressure on CMBS lenders to widen their deal search to sub-A properties in non-primary markets is inexorable. That reality has been evident in Boise, Idaho since Q4 2010.

Folks it’s getting better out there. Or at least it’s getting better for borrowers with properties which have no hair on them. Problem properties are still orphans in the world of long term fixed rate CRE finance. Those properties need infusions of equity or a lender JV or some other technique to share upside with capital sources.


*spreads are not directly determined by Treasury Bond yields, but spreads are influenced by T yields. Low T yields allow lower coupon interest rates and lower rates support comfortable DSC. As DSC narrows, the capacity of property to support debt decreases as does perceived risk. If you agree with PIMCO’s Bill Gross that the expiration of QE2 may presage increase in T Yields, then you agree that the CRE interest rate market is currently probably as good-as-it-gets.


J.P. Morgan leads $2.9 billion CMBS offerings

Wells Fargo and Royal Bank of Scotland are also selling bonds linked to office, mall and hotel loans as issuance accelerates.

By Bloomberg News

Published: May 17, 2011 – 1:00 pm


(Bloomberg) – J.P. Morgan Chase & Co. is leading banks marketing $2.9 billion of bonds backed by commercial mortgages as relative yields narrow amid investor demand for debt tied to skyscrapers, offices and shopping centers.

The J.P. Morgan deal consists of 42 loans on 84 properties, said a person with knowledge of the transaction who declined to be identified because terms aren’t public. Wells Fargo & Co. and Royal Bank of Scotland Group Plc are also selling $1.45 billion of bonds linked to office, mall and hotel loans.

The securities, which may be sold as soon as next week, are being offered as issuance in the $700 billion market accelerates. Banks have arranged $8.6 billion of commercial- mortgage bonds this year, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales may reach $45 billion in 2011, according to J.P. Morgan, as investors seek out higher-yielding assets with the Federal Reserve holding its benchmark interest rate at record lows.

“We expect demand to remain strong, and upcoming deals to be generally well-received,” New York-based J.P. Morgan analysts led by Ed Reardon wrote in a May 13 report. About $4.5 billion of new offerings are in the pipeline for the next two weeks, the analysts said.

The extra yield investors demand to hold top-rated securities linked to commercial real estate has declined to 187 basis points, or 1.87%, more than Treasuries, from 228 basis points at year’s end, according to a Barclays Plc index.

Money managers are turning to commercial mortgage debt as relative yields on investment-grade corporate debt declined between 17 basis points and 149 basis points since Dec. 31, according to Bank of America Merrill Lynch index data. Spreads last month declined to 145 basis points, the smallest gap since October 2007.

“[New-issue CMBS] offer attractive all-in-returns when compared to similarly-rated, duration-matched alternatives,” the J.P. Morgan analysts said.

The largest loan in the J.P. Morgan deal is a $199.8 million mortgage on the Newport Centre, a 1.5 million-square-foot mall in Jersey City, N.J. Macy’s is the largest tenant, occupying 229,889 square feet. Retail properties account for 41.1% of the pool, while office buildings make up 35.6%, the person said.

The offering by San Francisco-based Wells Fargo and Edinburgh-based RBS consists of 73 loans on 144 properties, said a separate person, who also declined to be identified because the sale isn’t public.

Torchlight Investors purchased the riskiest slice of the J.P. Morgan pool, according to deal documents. Selling the so-called B-pieces is a prerequisite for marketing the rest of the deal. The pool of B-piece buyers is growing amid surging sales.

BlackRock Inc., Rialto Capital Management and H/2 Capital Partners dominated the market for so-called B-pieces in 2010. Investors in this portion of commercial-mortgage backed securities can kick out certain loans from the pool if they deem them too risky, thereby policing underwriting standards.

Sales of commercial-mortgage-backed securities are a boon for property owners who have struggled to refinance maturing loans amid a dearth of new lending. Sales plummeted to $3.4 billion in 2009, choking off funding to borrowers with maturing loans, according to data compiled by Bloomberg. A record $234 billion of the debt was issued in 2007, the data show.


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