US CMBS volume spikes as credit slips

Fri Apr 26, 2013 3:13pm EDT

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April 26 (IFR) - US CMBS issuance this year has hit its strongest monthly totals since 2007, but some say the rally has been at the expense of underwriting standards.

More than US$8.5bn in private-label CMBS has been marketed to investors so far in April, including a new JP Morgan conduit for US$1.2bn, JPMCC 2013-LC11, that was announced on Friday.

A further US$2.8bn in government-backed Freddie Mac multi-family deals have also priced this month, according to IFR and Thomson Reuters data.

Increasing competition among lenders and cheaper bond pricing have made so-called large-loan CMBS more competitive against loans from typical multi-borrower conduits, resulting in skyrocketing single-asset CMBS issuance. More than US$11bn of these deals have been issued year-to-date, according to Fitch, compared with US$11.2bn for all of 2012.

"Large-loan CMBS deals of late are coming to market with some average assets and aggressive assumptions," said Huxley Somerville, the head of CMBS at Fitch.

"In fact, the large-loan CMBS landscape is changing so dramatically that Fitch is questioning what it's seeing."

Fitch believes the combination of unique property-level attributes, the current low interest rate environment, the prevalence of interest-only loans and aggressive income growth expectations has created a need for extra vigilance amid deteriorating underwriting standards.

In a report, the rating agency named four recent deals that it could not rate because it didn't think they deserved AAA grades.

For example, the recent US$160m MSC 2013-ALTM transaction, given Triple A ratings by S&P, Morningstar, and Kroll, was backed by a loan on a regional mall outside Orlando, Florida. The loan was for 12 years with an initial five-year IO period and an allowance for additional mezzanine debt.

Based on the overall debt level, Fitch would only have rated the top tranche AA, and a slice that received BBB- from the three agencies that were hired would have only received a Single B from Fitch.

INSUFFICIENT

Moody's has also recently warned the market that even some multi-borrower conduits do not have sufficient credit enhancement, given the stressed LTV ratios that the agency assigns when assessing deals.

"We rated four of the nine conduits issued in the first quarter," said Tad Philipp, the head of Moody's CRE research. "The five not rated by Moody's had an average Moody's LTV of 101%. We believe they were under-enhanced relative to the ratings that other rating agencies assigned, particularly at and just above the investment-grade cut-off point."

What's more, the share of loans with an IO period, which Moody's views as a bellwether of underwriting quality and credit, reached 42% in the first quarter, a so-called "CMBS 2.0" high. Of partial-term IO loans, the share with IO periods longer than 57 months was almost 50%, roughly the same as it was at the 2007 peak, although the share of loans with IO periods was then much higher, Philipp said.

The increasing risks have not stopped investors from snapping up the deals. On Thursday, JP Morgan priced the 1.64-year Triple A piece of a floating-rate multi-loan deal, JPMCC 2013-FL3, at one-month Libor plus 70bp, 5bp tighter than guidance. More than 64% of the collateral consisted of hotel properties.

However, the BBB- rated Class D tranche printed 10bp wider than guidance, at one month Libor plus 235bp.

On Friday, JP Morgan announced another conduit, underpinned by 52 loans on 82 properties. Both JP Morgan and Ladder Capital Finance contributed loans to the offering.

CBRE Capital Partners bought the B-piece, making it the directing certificate-holder of the deal.

Securitisation specialists predict another US$7.5bn in May volume. April issuance has been the strongest since December 2007, according to the Pension Real Estate Association.

CMBS issuance reached its peak at roughly US$230bn in 2007, while issuance last year was about US$48bn. Year-to-date issuance is more than US$32bn, according to IFR data, and industry observers say that 2013 issuance may reach US$70bn or beyond.

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