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
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.
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
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