CMBS volume now seen plunging to six-year low

By Al Yoon

NEW YORK, April 3 (Reuters) - The credit market seizure of 2008 will slash sales of a popular type of commercial mortgage bond to their lowest level in six years, worse than expected just a few months ago, a top underwriter said.

Issuance of bonds backed by a variety of loans on office buildings, hotels and retail stores could reach just $30 billion to $40 billion this year, about half of the levels predicted at the end of November, according to a JPMorgan (JPM.N) presentation this week.

Development of the so-called conduits led to an explosion in issuance, with the total CMBS market growing 43 percent since early 2006 to $770 billion at the end of 2007.

In a conduit, dealers including JPMorgan aggregate dozens of loans into a single security, giving borrowers easier access to capital and investors greater diversity. But competition for loans in 2006 and 2007 led to bubble-like price growth and an erosion in quality, raising red flags for investors getting burned by soaring delinquencies in residential real estate.

"Several bankers who I have spoken with recently believe that they may only come to market with one or two issuances for the entire year," said Brad Messinger, head of capital markets for Zenta, a New York-based company that assists dealers with asset pricing and valuation.

"Some of the recent staff reductions suggest that they are realigning their delivery capacity to this reality," he added.

Top dealers -- which also include Morgan Stanley (MS.N) and Wachovia Corp WB.N -- issued as much as $34 billion of the conduits in a single month in 2007. Conduits made up 81 percent of the $234 billion in U.S. CMBS issuance last year.

Banks have sold only $3.6 billion in conduit issues this year as market gyrations make valuations difficult. Commercial loans, including those stuck on balance sheets, may cause some $82 billion in bank write-downs over the long run, according to Goldman Sachs Group Inc. in a February research note. Total losses could reach $183 billion, Goldman said.

For the CMBS to recover, the credit crunch must ease so banks can originate loans more freely, Alan Todd, JPMorgan's lead CMBS strategist, said in his presentation on Wednesday, according to a document distributed afterward. More clarity from rating companies on potential downgrades of CMBS could also help stabilize the market, he said.

Federal Reserve liquidity programs, including the acceptance of CMBS from dealers as collateral for short-term loans, has helped buoy CMBS, based on derivative indexes.

Yield spreads on the top "AAA" rated CMBX-4 have rallied to below 1.4 percentage points this week from a record high of 2.77 points about a month ago.

"Liquidity helps AAAs, but credit issues remain unresolved," Todd wrote as the title of his presentation. He did not return a call seeking comment. (Editing by Leslie Adler)